Oil pendulum swings back
By MATHEW INGRAM Globe and Mail Update
If you think the stock market has seen a dramatic reversal of fortune, with a burst of optimism followed by a sharp decline, that's nothing compared with what oil has gone through. After rising to 10-year highs in the lead-up to war, crude tanked by more than 25 per cent after the shooting began, but has since made back more than half that ground — and it's not just bad news on the war front that has traders nervous.
What drove crude up close to the $40 (U.S.) a barrel level in the weeks leading up to the war was fear about a replay of the Persian Gulf war, in which Iraqi forces set fire to hundreds of Kuwaiti oilfields and threw a massive wrench into global oil supplies. When those fears were dispelled by the quick capture of Iraq's major oilfields and the war as a whole appeared to be going well, crude sank back to the mid $20s.
Have those fears come back to the forefront for some reason? No. Although the northern Kirkuk fields are still vulnerable, the majority of Iraq's oil production remains in the hands of the U.S.-led coalition, and U.S. forces continue to control the country's access to the Persian Gulf. So far, the war hasn't spilled over into Kuwait, Iran or Israel either, another fear that helped push pessimism higher.
On top of all that, OPEC — and especially Saudi Arabia, the major swing producer in the global crude cartel — helped pop the oil-price balloon when it said that it was willing and able to pump more to make up for the effect of war. Saudi Arabia alone said that it was pumping about one million barrels a day more than its previous quota, and that it had stockpiled about 55 million barrels. So why has crude climbed again?
Part of the rise is likely as a result of a feeling that the war isn't going as well as it was, and that this will keep Iraqi oil out of the market for longer than expected. But there's more to it than that. In the same way that the stock market has other things to worry about, including weak corporate spending and high unemployment, the oil market has other problems on its mind too — such as supply problems.
In the runup to war it was supply disruptions in Venezuela that were weighing on the minds of oil traders and helping keep prices high, as a labour dispute paralyzed the Latin American OPEC producer's output. As those concerns were dealt with and the war looked to be going well, crude prices began to subside — and now, just as those hopes have been proven too optimistic, the oil market confronts problems in Nigeria.
As of Monday, more than 40 per cent of Nigeria's previous production of 2.2 million barrels a day had been shut down as a result of civil unrest in the oil-producing western Delta region. There have been a series of violent uprisings by ethnic Ijaw militants, and several companies including Royal Dutch Shell have been reluctant to send workers into the area. To make matters worse, a major trade union is threatening a strike, which could further paralyze that country's crude oil production.
On top of all that, OPEC members are producing at or close to their peak production levels, and oil inventories in the United States are 7 per cent below the levels they were at a year ago. As a result, most analysts believe crude is likely to stay in the $30 range, after climbing too high before the war and falling too low afterward. As one trader said: "Prices appear to be entering a sideways phase, which will last until there are definitive developments." In other words, stay tuned.
E-mail Mathew Ingram at mingram@globeandmail.ca
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