Crude oil to stay volatile

PETALING JAYA: Crude oil prices will continue to be volatile in the
months ahead as uncertainties still cloud the global economic outlook
and therefore demand despite the recent rise in prices.
The price
of crude oil, both Nymex and Brent, have risen since the beginning of
the year after China, India, Germany and the United States released data
which showed improvement in economic activity and employment.
This
also buoyed equity markets around the world but Asian markets closed
mixed to slightly lower as investors remained cautious. The local
bourse's FBM KLCI was 0.62% lower at 1,504.22 with property and financial stocks among the main losers.
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Oil
prices have also surged after tensions in the key oil-producing region
of the Persian Gulf racheted following naval exercises in the Strait of
Hormuz by Iran, which test-fired missiles.
Energy consultancy Purvin & Gertz Inc senior principal Victor Shum told StarBiz that oil prices would be volatile in the months ahead because the global economic outlook remained very fluid.
“There's
only one good month of data,” he said, referring to the expansion in
the purchasing managing indices of China, India and the United States in
December.
Shum said it remained to be seen if the momentum would
continue after the Chinese New Year. “Only time will tell,” he said,
adding that geopolitical concerns had been reintroduced into the global
oil markets with the tension in the Persian Gulf.
Nevertheless,
Shum expects more upside risk than downside risk for oil prices, with
the Nymex oil price remaining above US$100 per barrel.
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Phillip Futures Pte Ltd
oil analyst Ker Chung Yang said in an email reply that despite what
appears to be a long-term bullish trend, the oil market “is set for
extreme volatility” with the inherent difficulties of supply management
along with wild swings in demand causing violent swings in prices.
He
cautioned that there could be downward pressure on prices with a
falling euro and Italy scheduled to hold a major bond auction today. “A
weak auction and/or a rise in their interest rates could send the
financial markets into a tailspin. This would be a negative for crude
oil and likely to pressure prices,” Ker said.
However, he said,
underlying fundamentals would put a floor on crude oil's possible fall
as producers rebalanced supply and demand to keep the market tight.
“Producers still have the capacity to reduce the daily production to
rebalance demand and limit the fall in prices in the face of a fourth
quarter global recession in 2011,” Ker said.
He said that based
on past recessions, the floor for Brent crude appeared to be in the
US$80-US$95 per barrel range. “A breakdown in prices below that level
will occur in the case of a 2009-like crisis, which could push Brent
down to the US$60-US$70 per barrel range,” Ker added.
As for
Nymex, he said, the upside would likely be capped at US$120 as the
likelihood of an European recession and the potential knock-on effects
on the rest of the world could put pressure on prices.
“Even if
the United States manages to avoid any contagion from Europe, growth
should be sluggish. Lastly, China is still dealing with the ongoing
effects of monetary tightening,” Ker said.
He added that low
crude prices could cramp investment in alternative production methods
like deep-sea and ultra-deep sea drilling and oil sand. “This could put
pressure on supply and once again set markets up for bullish moves,” Ker
said.