Oil prices buck the trend amid global recession

Oil prices buck the trend amid global recession
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First Published: Fri, Apr 24 2009. 12 36 AM IST
Updated: Fri, Apr 24 2009. 12 36 AM IST
In recent months, oil prices plunged as consumers curtailed fuel use around the world, with some analysts predicting that the dire economic situation would cause oil to fall to $20 (around Rs1,000) a barrel or less.
But in a twist, oil prices have stabilized at close to $50 a barrel. While prices may have fallen by two-thirds since their peak last summer, oil remains expensive by historical standards.
The resilience shown by the oil markets is not because of any improvement in the global economy or rise in oil consumption. Global demand remains on course for its steepest drop since the early 1980s, and oil inventories are at their highest levels in 19 years.
Instead, analysts said, oil is once again being sought by investors as a refuge against a slumping dollar and rising inflation.
Stabilization of the oil price is also a victory for the Opec (Organization of the Petroleum Exporting Countries) cartel, which succeeded in cutting output sharply to match lower demand. After helping to drive prices to record levels last summer, investors had deserted oil markets in the wake of the financial crisis.
Oil, which peaked above $140 a barrel in July, tumbled to $33 a barrel in December.
But oil futures in New York have since rebounded and are fluctuating between $40 and $50 a barrel. Oil settled at $48.85 a barrel on Wednesday, up $2.34. This week, despite a broad swoon in markets, oil never fell below $45 a barrel. Oil futures were up 60 cents at $49.45 a barrel on Thursday afternoon.
Serious questions loom over the global economy that would suggest lower, not higher, prices. Unemployment is rising sharply in the US, the Chinese economy is sputtering, Europe is stagnant and Japan is contracting. The World Bank forecasts that the global economy will shrink by 1.3% this year, the first decline in global output since World War II.
“At some point, you’d think reality has to set in,” said Tom Bentz, a senior energy analyst at BNP Paribas in New York. “All the news is pretty negative, and certainly demand continues to take a hit. And yet prices are still hanging on.”
The action of producers has been critical in providing a floor for prices. Opec members have in recent months stuck with pledges to reduce output.
Some experts also fear that even at today’s prices, oil companies will slash their investments in new production. Once the economy picks up, say in 2010 or 2011, these analysts predict that another price spike is likely.
“It makes you wonder how much longer we can hang on before another downdraft,” said Bentz of BNP.
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First Published: Fri, Apr 24 2009. 12 36 AM IST
More Topics: Oil | Recession | Slowdown | Fuel | Dollar |