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Energy - Volatile markets - Views on News from Equitymaster
 
 
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  • Dec 26, 2000

    Energy - Volatile markets

    The oil markets did not have much to cheer at the beginning of December '00 with oil prices, both Brent and WTI, continuing to rule firm at above $30 / barrel. The markets were still hot as Iraq threatened to withdraw its oil, constituting 3% of world supply, from the international markets.

    However, over the month of December'00 the prices of the natural resource have come off quite sharply. Brent blend crude oil has plummeted by approximately 33% from above $30 / barrels to $21.6 / barrel. A key reason for the precipitous fall has been the allaying of fears regarding the shortage of fuel oil in the developed western markets over the ongoing winter months.

    With oil prices coming off their 10-year highs the Organisation of Petroleum Exporting Countries (OPEC) think tank is operating over time. The decline in prices has caused the OPEC to turn wary on the fear of oil prices slipping to the lows ($9 / barrel) touched in FY99. Subsequently, the Venezuelan President, a key member of the cartel, has called on the members to defend the prices of the natural resource.

    To curb the volatility in oil markets the cartel devised a price adjusting mechanism. Under this mechanism the cartel would attempt to maintain the prices in the range of $22 - $28 per barrel. Hiking production by 500,000 barrels per day (bpd) if prices ruled above $28 / barrel for 20 consecutive working days. Vice-versa it would cut production should prices fall below the $22 / barrel mark. Consequently, the cartel is contemplating to cut production when they meet next in January.

    Despite the mechanism, which is not autonomous, oil markets continue to remain volatile. OPEC has undertaken 3 production hikes of an aggregate 3.7 mbpd over FY00 and 1HFY01. However, it plans to cut production on the fear of a price slump.

     

     

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