29th July 2008
“The Oil Factor”
The price of crude oil seems to be now ‘the factor’ affecting global market sentiments and a downward trend in oil prices may be the answer to a trend reversal in the current market sentiments. This month’s commentary focuses some questions on the oil factor.
Oil prices have risen to record levels in recent weeks, with traders in London and New York paying more than $147 a barrel for crude oil at its peak on 11 July. How much has oil fallen and has this been translated to cheaper pump price for the consumers?
Since July 11th, prices have fallen, dipping more than 20% to a low of $121.34 for a barrel on 29 July. Crude oil prices affect the wholesale cost of the petrol and diesel paid for by the major retailers. The good news is a number of those firms have passed on the lower prices to motorists at their forecourts, including our neighboring country, Singapore. The wholesale price of fuel also fell substantially last week. The price of refined diesel, for example, has fallen by 8.3% since it reached an all-time high on 11 July of $1,241 per metric ton.
Why did oil prices fall?
The perception in mid July that the slowing US economy could trigger a worldwide economic slowdown had clear implications on the expected demand for oil. Countries such as India and China depend on the US, Europe and Japan as major markets for their manufactured goods and services. If demand for their goods declines, as is expected, so too will their thirst for the oil and fuel needed to produce the products. Another factor helping to cut oil prices was on the supply side, where there were indications that tensions were easing between oil-producer Iran and the US over its nuclear program. This reduced fears that the supply of crude oil from Iran could be interrupted. Traders also pointed to news that a Chevron oil pipeline in Nigeria had reopened following an attack on it in June.
Are these the only factors that determine oil prices?
No. The price of oil on the international markets is determined by a combination of forces. There are the so-called fundamental factors of supply and demand which are expected to keep prices high in the longer term. On the demand side there is the rising need for oil from the ever-expanding economies of India and China, which need more fuel oil to run their factories and more petrol for a growing number of motor vehicles. On the supply side, there are concerns that it is taking longer than before to develop new oil fields, an average of at least 10 years, so it is difficult to increase output quickly to meet increasing demand.
This is exacerbated by critical shortages of skilled oil engineers, and the limited investments made by many state-owned oil companies who control the vast majority of the world's oil production. In the even longer term, there are worries that we may be reaching the limits of the world's finite oil resources and that production could begin to fall in the decades to come.
Can these explain the sudden changes in oil prices?
Not really, and crude oil is something of a special case. Oil is traded on futures markets, making it more vulnerable to the kind of speculation that can move prices by as much as $5 a barrel in a single day. According to Dr Manouchehr Takin of the Centre for Global Energy Studies this volatility is caused by oil traders. He says that oil traders are making decisions to buy or sell oil on a minute-by-minute basis, and are much more influenced by rumors and stories than their counterparts trading shares on stock markets. "Perception is the key word here because the fundamentals of the oil market don't change every minute". It is the perception of changes in either the demand or supply of oil that drives and fans market rumors.
Is the sudden drop in prices going to keep going?
Well, it’s hard to tell though measures have been put in place for curbing of oil trades. As the US Dollar continues to strengthen, demand begins to soften, and market manipulation is under a more watchful eye of the regulators, crude oil prices can be on the way down to as much as $70 to $80 per barrel by year end. Except for any other uncontrollable disruptions e.g. tropical storms or geopolitical risks, crude oil prices seem to be heading southwards which is translated to higher consumer confidence and better margins for many sectors of the economy worldwide. Certainly, inflation which is a huge concern at this moment for many Asian economies will ease as crude oil prices fall to sub $100/barrel levels. This will translate into more corporate margins, more money in our pockets and certainly a reversal in market sentiments globally.
.
“The Oil Factor”
The price of crude oil seems to be now ‘the factor’ affecting global market sentiments and a downward trend in oil prices may be the answer to a trend reversal in the current market sentiments. This month’s commentary focuses some questions on the oil factor.
Oil prices have risen to record levels in recent weeks, with traders in London and New York paying more than $147 a barrel for crude oil at its peak on 11 July. How much has oil fallen and has this been translated to cheaper pump price for the consumers?
Since July 11th, prices have fallen, dipping more than 20% to a low of $121.34 for a barrel on 29 July. Crude oil prices affect the wholesale cost of the petrol and diesel paid for by the major retailers. The good news is a number of those firms have passed on the lower prices to motorists at their forecourts, including our neighboring country, Singapore. The wholesale price of fuel also fell substantially last week. The price of refined diesel, for example, has fallen by 8.3% since it reached an all-time high on 11 July of $1,241 per metric ton.
Why did oil prices fall?
The perception in mid July that the slowing US economy could trigger a worldwide economic slowdown had clear implications on the expected demand for oil. Countries such as India and China depend on the US, Europe and Japan as major markets for their manufactured goods and services. If demand for their goods declines, as is expected, so too will their thirst for the oil and fuel needed to produce the products. Another factor helping to cut oil prices was on the supply side, where there were indications that tensions were easing between oil-producer Iran and the US over its nuclear program. This reduced fears that the supply of crude oil from Iran could be interrupted. Traders also pointed to news that a Chevron oil pipeline in Nigeria had reopened following an attack on it in June.
Are these the only factors that determine oil prices?
No. The price of oil on the international markets is determined by a combination of forces. There are the so-called fundamental factors of supply and demand which are expected to keep prices high in the longer term. On the demand side there is the rising need for oil from the ever-expanding economies of India and China, which need more fuel oil to run their factories and more petrol for a growing number of motor vehicles. On the supply side, there are concerns that it is taking longer than before to develop new oil fields, an average of at least 10 years, so it is difficult to increase output quickly to meet increasing demand.
This is exacerbated by critical shortages of skilled oil engineers, and the limited investments made by many state-owned oil companies who control the vast majority of the world's oil production. In the even longer term, there are worries that we may be reaching the limits of the world's finite oil resources and that production could begin to fall in the decades to come.
Can these explain the sudden changes in oil prices?
Not really, and crude oil is something of a special case. Oil is traded on futures markets, making it more vulnerable to the kind of speculation that can move prices by as much as $5 a barrel in a single day. According to Dr Manouchehr Takin of the Centre for Global Energy Studies this volatility is caused by oil traders. He says that oil traders are making decisions to buy or sell oil on a minute-by-minute basis, and are much more influenced by rumors and stories than their counterparts trading shares on stock markets. "Perception is the key word here because the fundamentals of the oil market don't change every minute". It is the perception of changes in either the demand or supply of oil that drives and fans market rumors.
Is the sudden drop in prices going to keep going?
Well, it’s hard to tell though measures have been put in place for curbing of oil trades. As the US Dollar continues to strengthen, demand begins to soften, and market manipulation is under a more watchful eye of the regulators, crude oil prices can be on the way down to as much as $70 to $80 per barrel by year end. Except for any other uncontrollable disruptions e.g. tropical storms or geopolitical risks, crude oil prices seem to be heading southwards which is translated to higher consumer confidence and better margins for many sectors of the economy worldwide. Certainly, inflation which is a huge concern at this moment for many Asian economies will ease as crude oil prices fall to sub $100/barrel levels. This will translate into more corporate margins, more money in our pockets and certainly a reversal in market sentiments globally.
.
No comments:
Post a Comment