Blunting oil speculation
Published:Sunday | July 10, 2011 | 12:00 AM
Dennis Morrison, Columnist
The move in late June by members of the International Energy Agency (IEA) to release 60 million barrels of oil from their strategic reserves knocked US$10 per barrel off the two leading benchmark crude prices - West Texas Intermediate and Brent - in the first week after the intervention.
The action came against the background of rising concern that Saudi Arabia's decision to ramp up oil production had not sufficiently dampened the upward pressure on prices.
Among market-watchers the assumption was that the United States and other governments had acted under political pressure as gasolene prices escalated sharply and were threatening to make a dent in consumer spending.
There were strong signals as well that regulators of commodity markets in the US and other countries were convinced that the oil market was being manipulated and that they needed to blunt the speculation.
With evidence of a weakening in the pace of economic recovery mounting, and the run-up in oil prices being identified as one of the main threats, policymakers would obviously be anxious that price movements more closely reflected supply and demand factors.
Prior to the release from the IEA strategic reserves, Brent crude oil the benchmark used by Europe and other important oil consuming regions, had traded as high as US$120.49 per barrel on June 13.
Meanwhile, West Texas Intermediate, the main reference used in America, stood at a high of US$101.95 on June 9.
Both prices began falling, with the news of Saudi Arabia's decision to increase production, and expectations that China's increased demand for oil would be met by increased output from Saudi Arabia.
By June 22, the day before the IEA's move, the Brent price had already fallen by about US$7 to US$113.59, and on the actual day of the move - June 23 - it went down by another US$5.32 to US$108.27.
The West Texas Intermediate price had also fallen by roughly US$7 to US$94.96 per barrel, and on June 23, it went down further by over US$4 to US$90.70. The Brent benchmark price actually slipped a further US$4 to reach US$104.57 on June 27, a total decline of nearly US$16 per barrel from the price reached on June 13, while on the same day, the West Texas Intermediate traded just a few cents below the June 23 price.
Positive result
To the extent that the IEA's intervention was aimed at putting downward pressure on gasolene prices, there was some initial positive result as prices in the US, which had climbed to well above US$4 per gallon, began to retreat, and came down by more than 30 cents per gallon by the end of June.
But in the peak summer driving season, the impact may not have been as significant as intended.
Moreover, by July 5, both the Brent crude and West Texas Intermediate reference prices had begun to move up again.
By July 5, Brent crude had increased by nearly US$9 from its low point to reach US$113.36 per barrel, and West Texas Intermediate had gone up by US$6 to US$96.94 per barrel.
On Friday, July 8, Brent settled at US$118 and West Texas Intermediate at US$96.20.
In Jamaica, consumers have seen that the respite from rising oil prices has been short-lived, with billing prices going up in successive weeks.
It is possible that as the full impact of Saudi Arabia's production increase and the release of oil from the strategic reserves are felt, speculative pressures may ease, and price movements could be moderated.
Most forecasters are, however, anticipating that demand for oil will strengthen in the coming months, and hence, prices will remain at elevated levels. Jamaicans should, therefore, not expect any significant relief from the current high energy prices.