Energy – Will it spoil the show? - Views on News from Equitymaster

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Energy – Will it spoil the show?

Sep 23, 2000

Oil has made the headlines all this week. Prices of the energy source continued to surpass earlier (ten year) highs to touch $35 per barrel. The Organisation of Petroleum Exporting Countries (OPEC) on September 10 announced their decision to augment production by 800,000 barrels per day (b/d), which comes into effect from October 1. This takes the aggregate increase to 3.2 m b/d over the last six months. However, the prices have shown no sign of softening.

The latest increase failed to dampen prices, as security concerns arose in the Middle East. Iraq has accused Kuwait of stealing its crude from the wells near the border. This accusation had been the main contention resulting in the Gulf War. Consequently, oil prices perked up with the possibility of instability in the region.

To stabilise the upward bound prices the U.S President has authorized the release of crude from the Strategic Petroleum Reserve (SPR). The U.S Government will release 30 m barrels of crude over a 30-day period. The announcement immediately impacted the oil markets with crude prices declining by more than a dollar to a barrel. One must remember that the U.S presidential elections are around the corner and could be the motivator for such a release.

Prices will continue to remain sticky as the Northern Hemisphere enters the winter months. Traders will also be closely watching the fuel oil reserve data released by the American Petroleum Institute (API). Currently, the reserves are 24% lower than the previous year’s level. The OPEC meets again on November 12 to review oil prices. They have not ruled out a fourth production increase to reign in the galloping crude prices.

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