Is oil heading for another price spike?
The oil market is booming again, and talk of another oil spike is spreading. But the fundamentals of supply and demand remain weak. So what's going on?
The oil market is booming again. Prices hit a seven-month high of $63 a barrel in New York this week, almost double February's low of $33. In the past four weeks alone, it has gained 25%. Talk of another oil spike is spreading; last week Iran's oil minister warned of a "price shock" once the global crisis is over.
What the commentators said
You would think the market is "rapidly returning to health", said Javier Blas in the FT. But the fundamentals of supply and demand are "much weaker than current prices imply". The International Energy Agency (IEA) has just lowered its 2009 forecast again demand hasn't slid this fast since 1981 while inventories in the OECD are at their highest since 1993 and there is a record amount stored on tankers.
So what's going on? The weakness of the dollar has been a recent factor, while according to Sanford Bernstein, China has boosted prices by topping up its strategic petroleum reserve. Meanwhile, traders are looking beyond the downturn and factoring in the likelihood of a supply squeeze. The IEA has acknowledged that spending on oil exploration and future production will fall by twice as much as it originally forecast, while the world's biggest fields are "seriously depleting", said Liam Halligan in The Sunday Telegraph. Prices have thus risen across the futures curve.
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But spot prices look vulnerable. Opec compliance with cuts is faltering, as it always does, said Ed Morse of LCM Commodities. And Jeffrey Currie of Goldman Sachs sees a risk that the market will run out of oil storage capacity as inventories are so historically high. The excess oil coming on to the market would "force spot prices lower".
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