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Energy: Oil markets sabotaged

Sep 13, 2001

The terrorist attacks on the U.S commercial capital, besides sending shock waves across open societies, rocked global financial and commodity markets. Two commodities to take centre-stage were gold and crude oil, which spiked up sharply, although for different reasons. As events unfolded on tragic Tuesday, crude oil (Brent blend) prices breached 9 month highs of $31 / barrel before closing the day 5.9% higher at $29.1 / barrel. The sharp jump seems to be a knee-jerk reaction, as markets tried to come to grips with the ramifications of the 'act of war' against one of the most powerful nations of the world. Similar nervousness and doomsday theories sent financial and other commodity markets reeling.

Crude oil prices have retraced some of the gains registered the previous day. Brent oil closed the day at $28.8 / barrel while October futures were trading at $28 / barrel. The higher prices, nonetheless, do reflect the market belief that the perpetrators belong to some Middle Eastern terrorist outfit. Consequently, any retaliatory activity could sabotage crude oil supplies.

The Organisation of Petroleum Exporting Countries (OPEC) and U.S defence personnel have helped placate some of the fears. The OPEC secretary general, Ali Rodriguez, has stated that the body will work towards maintaining market stability and ensuring sufficient supply of oil. This could also include increased production if deemed necessary. Although retribution could ultimately be the agenda, U.S is expected to adopt a responsible line of action for bringing the perpetrators to book.

Oil markets have witnessed significant volatility over the past two years, as prices shot through the roof from $15 / barrel to $35 / barrel. In calendar year '01, oil prices have remained firm despite the deteriorating global economic environment. This is largely due to the OPEC attempting to maintain balance in oil markets. The cartel has cut output thrice this calendar year by an aggregate 3.5 m barrels / day (mbd). The latest cut of 1 mbd came into effect in September '01. On the other hand, the International Energy Agency (IEA) has reduced estimated oil demand several times this calendar year. The latest estimates place global oil demand for 2001 at 76.4 mbd. As per OPEC estimates, non-OPEC production is expected to be 49.2 mbd, which indicates OPEC production is expected to meet 35.6% of global demand.

The current spike in oil prices seems to be largely due to the uncertainty concerning the outfit involved in the terrorist attack. In the event any of the OPEC members are indicted there could be pressure on prices, as supplies could get hit. But with early pointers indicating at terrorist outfits in Afghanistan, oil prices could retrace their steps. Having said that, global sector fundamentals look threatening. IEA has reported a drop in oil inventories of member countries for the month of July. OPEC has effected another 1 mbd production cut in September and the Northern Hemisphere is headed into the high consumption winter months. Consequently, prices could strengthen over the next three months.

The Indian refining companies have nothing much to cheer for in FY02. Petroleum product consumption, like last fiscal, is showing signs of remaining flat. Oil prices continue to exhibit firmness. Although the Government has repeatedly stated its intentions to deregulate the petroleum sector, the first half of the fiscal is about to close with no progress in that direction. That said, the Government has permitted oil companies to enter into oil future contracts. Consequently, the companies could ride over the short-term volatility in oil prices seen in the past few days. A prolonged period of higher oil prices, arising from U.S retaliatory activity, could adversely affect their bottomline.

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