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Oil prices reach near record highs despite market glut

By By SYED RASHID HUSAIN
Oil prices are on a roller-coaster, oscillating in the red zone. The prices needs to go down, consumers as well as producers concede.

Saudi Arabia's Minister of Petroleum and Mineral Resources Ali Al-Naimi, the virtual mover and shaker of the energy world, calls the price rise "unjustifiable." OPEC Secretary General Abdullah El-Badri says oil producers are "concerned."

And the head of the International Energy Agency (IEA), Nobuo Tanaka, is terming the prices "very high," warning that this could undermine economic growth. "Certainly current oil prices are very high . . . (we are) alarmed that it could negatively impact the economic growth," Tanaka told reporters in Kuwait last week. "The high price is pressuring down the growth rate of oil demand," he added, citing the examples of the United States and China where demand erosion is getting apparent.

And in the meantime supplies appear adequate to meet the global appetite. Saudi Arabia underlined last week that markets were "actually oversupplied." And for a change, even President Barack Obama is underlining that supplies are sufficient to meet demand. Speaking at a community college in suburban Virginia last week, he said: "It is true that a lot of what's driving oil prices up right now is not the lack of supply. There's enough supply. There's enough oil out there for world demand."

And in the oil fraternity, few executives have a better vantage point on demand, supply and prices than Rex Tillerson, chief executive of ExxonMobil. While participating in a round-table with the energy and commodities team of The Financial Times, last week, he underlined that with inventories in the US at "near-record highs" and stock levels in Europe and Asia within the normal ranges, the global oil markets were "well supplied."

"So there's plenty of oil on the market," Tillerson insisted.

And this convergence of opinion is rare! Major stake holders from both sides of the divide today agree that supplies are adequate and that there is no dearth or physical shortage of crude on the markets.

But with markets adequately supplied, the current spike becomes all the more illogical and incomprehensible. And this is all the more perplexing in view of the Chinese move to cool growth and slow inflation, impacting the demand growth rather adversely. And despite global economy in distress, China remained the shining star on the horizon, the global growth engine all these years. Now China is also showing signs of slow down. Year-on-year, Chinese oil demand growth slowed to 9.6 percent in February from 16 percent in December. "We have already observed slower oil demand growth rates in China. Clearly, the speed of growth is declining," Nobuo Tanaka of IEA told Reuters last week.

Added to it, the specter of demand destruction is also haunting the energy world. Indeed the world economy is not in the most robust of health. S&P has just downgraded US debt outlook from stable to negative, generating ominous signs all around. Many are pointing to the nascent, emerging demand destruction in the United States and indeed elsewhere.

This could also be gauged from the fact that Saudi output in March was down to 8.292 million bpd from 9.125 million bpd a month earlier. Although some analysts in the western media portrayed this as a Saudi decision, the fact remains that Saudi Arabia did not willfully opt for it. Markets forced it. There were apparently no takers for the additional volumes, most here in Dhahran, the virtual global energy capital, insist.

But indeed the million ... or rather the billion-dollar question is, despite all this, why are markets so erratic? What is keeping the global crude markets bullish?

The regional uprising and the associated political uncertainty has contributed, yet the fact remains the resultant outage has not really stretched the global demand-supply balance. Most fingers today point to speculation as the culprit. In a rare outburst, President Obama too blamed speculators for driving the oil prices higher and higher. That was interesting.

"The problem is ... speculators and people make various bets, and they say, you know what, we think that maybe there's a 20 percent chance that something might happen in the Middle East that might disrupt oil supply, so we're going to bet that oil is going to go up real high. And that spikes up prices significantly," Obama told his audience at a community college in Virginia.

The president also said the US government was to investigate unfair speculation. "We're going to be monitoring gas stations to make sure there isn't any price gouging that's taking advantage of consumers," he emphasized.

And while addressing a town hall meeting in Reno, Nevada, President Barack Obama announced a probe into oil price fraud and speculation, hoping to limit the rise in gasoline pump prices. Obama said a new Justice Department task force would "root out any cases of fraud or manipulation" that may have caused higher prices. "We are going to make sure that nobody is taking advantage of American consumers for their own short-term gain."

And that operation is underway. The US Justice Department has formed a working group to evaluate possible manipulation of oil and gasoline prices as well as the role of speculators.

Attorney General Eric Holder entrusted the working group to oversee if there was price manipulation in the energy sector and to examine the role of speculators and index traders in oil futures markets. "We will be vigilant in monitoring the oil and gas markets for any wrongdoing so that consumers can be confident they are not paying higher prices as a result of illegal activity," Holder said in a statement. "If illegal conduct is responsible for increasing gas prices, state and federal authorities should take swift action."

It is also being considered by a government watchdog to place caps on the number of oil derivatives contracts any one company can control.

Two US agencies that investigate potential energy market manipulation -- the Commodity Futures Trading Commission (CFTC) and Federal Trade Commission (FTC) -- have also agreed to share information on potential probes.

"There is a Wall Street premium on gas prices today," CFTC Commissioner Bart Chilton told Reuters. "Every time folks fill up their tanks, they can expect that several dollars are due to speculation."

And this position is almost what OPEC has been clamoring for ages, it now seems. Minister Al-Naimi reiterated last week too that speculation over the future oil markets is mainly behind the current hike. Secretary General Badri has also stressed once again on introducing "some regulations" to curb speculation in the oil markets.

This is a window of opportunity. The growing convergence of views on the critical issues of the level of supplies and speculation is monumental -- and indeed healthy -- to say the least. This is a rather unusual development. All of a sudden speculation seems occupying the center stage. What a transformation indeed!

© Arab News 2011