GLOBAL VOLATILITY IN OIL PRICES
SAAD ANWAR HASHMI
Oct 1 - 7, 2012
Oil price volatility has been under question where the world economy has witnessed, at times large variations geared through demand and supply, political issues and decisions, short and long term decisions untaken by OPEC, global recession and more recently the European crisis. Oil prices may show large variations with the most superficial issues yet may show minor fluctuations with news sparked through an issue as large as the European debt crisis. Putting a call on the trend with which the oil prices will move or predicting future prices poses a challenge. Not even the best financial models on Wall Street are able to judge the oil price movements since volatility may be a culmination of a number of issues or just a few. Such volatility sparks a trend where speculators bet on rising oil prices through Futures in hopes to yield a healthy return. The stock market becomes jittery if any fluctuations are witnessed in the oil prices, however, one must view the speculation as market practice to earn through capital gains on stocks. Just as OPEC, future traders are also blamed to drive up the price of oil. In 2008, the oil prices reached US Dollar 147 per barrel and currently are expected to be maintained above US Dollar 100 per barrel in the long run.
In international markets, oil traders bet on oil prices for a healthy return and to hedge against devaluation in the currency e.g. the US Dollar and inflation. OPEC has often announced price revisions citing demand and supply issues through the real reason maybe very different. For OPEC, the GDP of oil exporting countries is dependent on the price of fuel which means that the higher the price, the higher the GDP translating into economic prosperity.
OPEC countries currently account for 60 percent of the world demand with each country including Saudi Arabia, Russia, Iran, Nigeria, Yamen, UAE and Bahrain expecting to grow between 5 percent to 7 percent in CY12. The growth would need to be supported through adjustments in oil prices which guarantees revenue for the government to meet budgetary expenses. OPEC predicts that during CY12, the breakeven will be around US Dollar 85 per barrel. The oil exporting countries know that curtailing suppliers would result in high oil prices based on demand and supply gap and are reluctant to increase supplies to lower the price form current levels trading at US dollar 90 per barrel. It is also expected that Oil exporting countries would like to maintain a threshold of minimum US Dollar 100 per barrel to help sustain the growth of their economy. Oil companies operating in these regions with high oil prices are able to book larger profits and higher dividends for the investors with increase in stock price.
We know that oil exporting countries have excess capacity and can pump out more if need arise to meet demand. Saudi Arabia supplies 66 percent of the world oil requirement, any uncertainty which restricts oil supplies would weigh heavily on the Saudi government to increase supplies. With dollar fluctuations and possible devaluation, oil prices would result in a hedge once again expected to drive up oil prices. Any future unrest in Middle East may impact the future supplies of oil.
In an ideal environment no OPEC member would like to see a decline in oil prices which would in turn hamper the GDP of the country. Decisions are therefore taken through political pressure, to assist the world economy move out of recession and maintain price stability through control over supply side costs keeping oil prices stable.
The way to best analyze the oil market is through fundamental and technical analysis. Different analysts analyzing the same data put forward a different take on the future movement of oil prices. More currently where one major investment bank in New York would expect the oil prices to dwindle to US Dollar 45 per barrel be the end of CY12, another analyst would quote a similar stance predicting oil prices to hover around US Dollar 85 per barrel. Fundamental analysis becomes extremely tricky as the market movements or future is unknown. Models prepared today to predict the intrinsic value of the stock through analyzing the industry, economy and financial situation of the company under review may miss fire with future movements.
Another challenge is to predict the direction of the stock through Technical analysis which involves the study of statistics such as past prices, trends and forecasts maybe used as a suggestion to predict the oil movements or that of any stock. Using a combination of fundamentals and technical, some analysts may steer investors in the right direction while others may completely miss triggers in the market. With thousands of analysts and traders speculating the oil price, volatility is bound to continue.
The question remains what will be the oil price for CY12 and later CY13. The Eurozone crisis will cause a stir in the oil prices if the debt crisis cannot be settled. As USA economy shows signs of recovery, more demand will be generated for oil for consumption and manufacturing output. The political uncertainty in Middle East and ongoing issues with Iran may hamper supply. The global oil demand is expected to be 90 million barrels by the end of 2012 only expected to grow 1.5 percent to 2 percent in CY13. OPEC countries currently meet 38 percent of world demand whereas non OPEC countries meet 52 percent of the demand.
The OPEC countries are also criticized for not finding new drilling locations to extract fresh oil. USA on the other hand is also blamed for high reliance of oil imports without developing and using internal reserves which could cushion global supplies.
The oil price volatility will affect the overall prices of commodities consumers buy and will result in supply side inflation if not controlled through a strong price control mechanism. Any volatility in the oil prices will particularly affect the developing countries where inflation is highly skewed with price of inputs used for production particularly oil. Though it is difficult to predict the future movement of oil prices, it is expected that prices will rise beyond current levels.