Page last updated at 15:12 GMT, Monday, 27 October 2008

What is going on in the oil market?

By Anthony Reuben
Business reporter, BBC News

Does anybody believe that they can predict what is going to happen to oil prices any more?

Graph of US light sweet crude prices

In July, light sweet crude was trading above $147 a barrel and respected analysts were predicting that it was on the way to $200 a barrel.

Three months later, it is approaching $60 a barrel and a 1.5 million barrel per day cut in output by the oil producers' cartel Opec last week did nothing to stop the fall.

"All Opec confirmed for the market is how weak demand is," says the oil trader and analyst Stephen Schork.

"We're still in a hangover from the $150 party."

Global downturn

In the summer, it did seem that whatever news came out the oil price would continue to rise.

Now, everybody is saying that the falling price is a result of the global downturn, which will reduce demand for oil.

If it carries on falling at this rate the price will be zero by Christmas
Sandrine Torstad, StatoilHydro

In July, although we did not know about the full extent of the slowdown, we certainly knew that all was not well in many of the world's biggest economies, so what has changed?

Until three months ago, some people in the market expected oil to hit $200 a barrel on the basis that oil was close to running out, says John Hall from the energy consultants John Hall Associates.

"Now, just three months later, it is the opposite and producers cannot cut output back fast enough to keep up with falling demand," he says.


Before July there appeared to be a belief that prices could rise and rise and people would still buy just as much oil.

Oil traders on Nymex
Prices have continued to fall despite the Opec production cut

"The market was testing how high prices could go before demand was hit," says Sandrine Torstad, head of market analysis at the Norwegian oil company StatoilHydro.

"The market was overshooting and now we are seeing undershooting as the market moves from ultra-bullish to ultra-bearish."

So what happened in the middle of July to make that sudden change of sentiment in the market?

It was largely in the data coming from the US, which is both the world's biggest energy consumer and one of the few places that releases reliable figures on energy use and reserves.

By July, there had already been signs that US consumption was falling, but the market had been so bullish that they had been ignored, until finally traders had to take notice.

Zero by Christmas

So the market was driven up by a combination of fears about where the supply was going to come from to meet growing demand from India and China, and is now being driven down by the perception that there may be over-supply because so many big economies are going to reduce their demand as they go into recession.

Is anybody prepared to stick their neck out and make predictions, even after the extraordinary year we have seen on the oil market?

"There has to be a balance somewhere," says Mr Hall.

"I think we're quite close to it now."

And it can be said with confidence that the rate of falls will at least slow.

"If it carries on falling at this rate the price will be zero by Christmas," Ms Torstad points out.

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