The Hindu Business Line : Crude prices jump 100% in one year; output may drop

On the boil
Market unlikely to break through the $100 a barrel psychological barrier to dip lower.
US demand in the second quarter may not prove as weak as in the first quarter.

G. Chandrashekhar

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Mumbai, May 9 Crude prices have appreciated by 100 per cent in last one year. On May 7, crude oil on NYMEX traded at $123.53 a barrel, double the price of $61.55 a barrel exactly a year ago. A week ago the price was $113.50 and a month ago $109.05. This extra-ordinary price performance has sent ripples thorough the global economy.

Worst to follow

But the worse is yet to come. Experts forecast the market to move further upto $130 a barrel in less than a month from now. Most forecasters have now revised their price targets up by $15-20 a barrel from their previous levels. A look at the Commitment of Traders report as of April 29 showed that on NYMEX, the non-commercials (popularly known as speculators) share of the open interest was relatively modest. Their futures net long position as percentage of open interest was only 4 per cent. The all-time high was 18 per cent.

The crude market continues to simmer with each passing week pushing the market to new highs. Market fundamentals and changes therein continue to impact the crude market. Both demand side and supply side factors are at work. Supply shortfall is the key factor to watch.

Supply weakness

Instability in Iraq and disruptions in Nigeria are risks to be monitored. The chronic weakness of non-OPEC supply intensified in the first quarter. Early data for 2008 show further big declines in supply. The year is likely to witness a marginal contraction in output.

OPEC, on the other hand, has been following a cautious policy relating to output. This approach is unlikely to change anytime soon.The steady drip of worse-than-expected supply data continues and against this backdrop, price risk is moving firmly to the upside, according toexperts. .

OECD CONSUMPTION

The demand side continues to look robust, despite apprehensions of an economic slowdown. While OECD consumption was flat year-on-year in the first quarter of 2008, non-OECD demand has progressed undisturbed. Indeed, the latter more than compensated for the former.

In particular, Chinese domestic demand growth accelerated. Overall, Asian demand remains strong. There is also expectation that the US demand in the second quarter may not prove as weak as in the first quarter, raising the possibility of further tightening. The US crude oil stocks are slightly above the seasonal average. However, a smaller than normal build in global stocks in the second quarter is expected due to continued supply tightness.

EFFECT ON FOOD

Clearly, the world is unlikely to witness a sharp downward correction in crude prices anytime soon. At least into the foreseeable future, the market will be in triple-digit and most unlikely to break through the $100 a barrel psychological barrier to dip lower. The pervasive inflationary effect of high crude prices, especially on foodcrops, is sure to pose a big challenge to Governments around the world.

How New Delhi would tackle this scary scenario remains to be seen.

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