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Energy - Sinister plot? - Views on News from Equitymaster
 
 
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  • Oct 7, 2000

    Energy - Sinister plot?

    World oil prices have taken more than a breather, prices are down $5.5/barrel from $34.9/barrel to $29.4/barrel. This was largely on the news that Washington has found buyers for its entire crude oil release of 30 m barrels.

    The US president, last month, announced the release of 30 m barrels of crude oil from the strategic petroleum reserve (SPR) to cool down the heated oil market. Sobriety has been restored as consumer anxiety over heating oil shortage has been allayed. But were the prices a pure play of demand and supply?

    The OPEC has hiked production thrice in the first half of FY01. The production hike in April, June and September increased oil supply by 170,000 barrels/day (bd), 708,000 bd and 800,000 bd respectively. This is an aggregate increase of 3.2 mbd in the first six months of FY01. But the move failed to restore any moderation in prices.

    However, one must remember that after the second production boost Kuwait announced disruptions in its major refinery due to a fire. Meanwhile, Venezuela announced port problems halting port activity. This news resulted in oil markets remaining bullish.

    Following the third hike on September 10 security concerns arose in the Gulf region. Both Kuwait and Iraq accused each other of stealing crude from their oil wells at the border. Consequently, the announcement failed to dampen prices.

    Nevertheless, production for the first half has been augmented by 3.2 mbd or 96 m barrels per month. Further, Saudi is said to be releasing oil over their specified quota. These events have failed to bring down oil prices. On the other hand the US announcement brings in additional oil of 30 m barrels in October and this sends oil prices pummeling by $5.5/barrel in a week.

    The US refineries are reported to be operating near 100% capacity utilization. If this is true how has consumer anxiety over heating oil supply been allayed? Theoretically, with capacity bottlenecks heating oil should remain in short supply.

    But oil markets may not be based on pure economic theory of demand and supply. Several dynamics seem to be operating in the market, which the common market participant may never be aware of.

    On a lighter note Japan is reported to be entering the oil market with a supply of 6 m barrels of heating oil over a three-month period. Hazarding a call this should further ease the volatile oil markets.

     

     

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