It's time the price of oil fell
By Lloyds List Comment
Friday 3 July 2009
THE price of oil seems to belie the view that markets behave rationally. Oil has been on a roller-coaster ride during the past 12 months, a period dominated by the crisis in financial markets and the accompanying recession.
Just a year ago, the price of a barrel of crude soared to a high of $147 before plummetting earthwards to $35 in February.
At that point, a contango in the oil market — when forward prices are higher than those for spot cargoes — tempted oil companies and traders to store crude on tankers in the hope of capturing a handsome profit a few months later. Their gamble has paid off: the oil price recovered to $74 in mid-June and is now close to $70.
This may be less than half of the record established a year ago, but is hardly justified on fundamentals.
The oil price recovery of the last six months cannot be attributed to a genuine increase in demand, given the dampening effect of recession. Indeed, the outlook for oil consumption has deteriorated sharply.
The International Energy Agency last week forecast that global demand will grow at an annual rate of just 0.6%, or 540,000 barrels per day, between 2008 and 2014. The agency’s latest prediction for volumes in 2013 is 3.3m bpd lower than its previous effort at crystal ball gazing.
With economic demand being sucked out of the market, the oil price has been buoyed by currency movements and geopolitical factors. When the dollar started to weaken, many investors who were holding the greenback moved into oil as a safe haven.
Moreover, civil unrest in Iran and attacks on a pipeline in Nigeria have stoked fears of a disruption to supplies.
Factors such as these should no longer be sufficient to enable the oil price to defy gravity, however, as there is now plenty of slack in the supply side. As demand has weakened, the Organisation of the Petroleum Exporting Countries’ spare supply capacity has increased to 4m-6m bpd, and is forecast to rise to 7.8m bpd next year.
While a lower oil price will remove the demand for tankers for storage, it should ultimately be beneficial for shipping. After all, a harmfully high oil price could derail the economic recovery so badly needed.
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