Global oil prices have seen significant volatility in the recent years. International crude oil prices, which surged to an all-time high during mid-2008, plunged significantly towards end-2008 consequent to the slowdown. With concerns regarding global recession waning gradually, oil prices once again started moving northwards during 2009. This largely mirrored the improving business sentiment as well as economic revival and was widely anticipated. However, the sharp surge in global oil prices during last few months is distressing and has imparted cautiousness amongst policy makers world-over. This sharp surge in the prices of crude oil has once again raised concern about global growth story and its sustanability. It seems that there are some more factors behind this increase rather than only traditional economic theory of demand and supply mismatch.
The ICE Brent price surged close to $100/bbl mark as on February 4, significantly higher than $69.6/bbl price registered on February 5. Price of dated Brent grew by almost 23% (y-o-y) to touch $91.8/bbl (average) during Dec 2010 -- the level last seen in September 2008. The domestic oil prices as measured by the WPI for mineral oils also grew by almost 16.7% (y-o-y) during January 2011 as against 15.8% during Dec 2010.
Given that India imports almost 80% of its crude requirements, tracking fluctuations in global oil prices is warranted. It is imperative to see the key factors driving the current surge in global oil prices in order to gauge their movement in the coming months.
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The current surge in global oil prices in the face of high global inventories of crude oil is intriguing. Despite some reduction from the previous month, US commercial oil stocks remained at a surplus of 75 million barrel (mb) during December 2010 -- above the five-year average; commercial oil inventories in Japan also rose by 9.1 mb in November 2010. This, in fact, is an indication of a persistently well-supplied market and belies any supply side pressures on oil prices. The upward pressures on the global crude oil prices are being exerted by the improving demand and speculative activities in the global oil markets. A slew of macroeconomic indicators corroborate that growth in emerging economies has remained robust during 2010. The US and Japan are also witnessing some improvement in private consumption consequent to stimulus measures. The expansion in global economic activity followed by the expectations of sustained improvement in the same led to bullish market sentiment and a rise in investment flows into major commodity markets particularly crude oil, which in turn pushed global oil prices to higher level. The US Commodity Futures Trading Commission (CFTC) report reveals that net investment in WTI crude oil rose by 8.0% (m-o-m) during Dec 2010 as against 3.2% in November 2010.
Moreover, speculation activity in the crude oil futures market, as reflected by the rise in net long positions of money managers, seems to have played a role in driving oil prices up. Net long positions of managed money in crude oil (on Nymex) increased to 201.9 mn bbl contracts as on February 1, higher than 172.0 mn bbl contracts as on January 25. The front-month WTI futures moved in tandem and recorded an increase of $4.6/bbl in a span of a week's time to $90.8/bbl (as on February 1). This underscores the role of speculative activities in influencing crude oil price.
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Future outlook
The future course of global oil prices largely hinges on the nature of economic recovery in the US, further developments with regard to sovereign debt issue and concerns of overheating arising in some EMEs. Further, weaker-than expected growth in oil demand during 2011, surplus stock of crude oil and political tensions in Egypt might impact global oil prices in the medium term.
