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Monday, 18 December, 2000, 14:26 GMT
Oil's extraordinary year
By BBC News Online's Bob Trevelyan
The year 2000 was the year that "irrational exuberance" - famously used of stock market investors - came to the oil markets.
Crude oil prices broke a succession of 10-year highs in the second half of the year, reaching more than $35 a barrel, although there appeared no shortage of physical supplies.
High oil prices also raised fears of inflation in Western economies, and might have deterred central banks from interest rate cuts.
And they led to worldwide demonstrations against high fuel prices, which threatened to destabilise governments, not least in the UK, in the autumn.
There were other anomalies too. This December - the US and European winter - when demand is usually peaking, prices began falling again.
Analysts used to looking at the market purely in terms of supply and demand found their theories confounded.
Then there was Opec, the Organisation of Petroleum Exporting Countries. The producers' cartel that appeared hopelessly divided three years ago surged back to world prominence as oil prices rose.
And yet, perversely perhaps, it seemed less able than ever to manage the market and produce the stable, reasonable prices it claimed to want.
Speculators move in
The year 2000 had started with oil prices relatively buoyant - at more than $20 a barrel - as traders calculated that the "millennium bug" might disrupt supplies.
When these concerns receded and prices started falling, Opec stepped in to warn that its supply cuts programme - instituted in response to the 1998 price crash and due to expire at the end of March 2000 - might be extended.
The cue was given and a renewed rally got underway as speculators perceived possible supply shortages in the future.
This speculation in the futures market was one of several trends that became more pronounced in 2000 and lessened Opec's influence on crude prices.
In the absence of timely or reliable industry data - which has always been a problem - traders were betting on the market's direction as never before.
Opec officials have recently claimed that speculation is responsible for up to $8 of the cost of each barrel of oil.
Product prices propel crude
In an unusual development, crude oil prices were also propelled higher by strong prices for refined products.
The cause was a lack of refining capacity and very low stock levels in the US, leading to shortages of products such as petrol (gasoline) and heating oil at crucial times of the year. Product prices shot up, taking crude with them.
Opec also claimed another factor was at work, saying the market in Brent crude - the world benchmark, supplies of which are dwindling - was being manipulated.
The cartel has said it wants a new pricing mechanism based on average prices of several, more widely available, crudes. But it has yet to put forward detailed suggestions.
Four production increases
Opec's response to the price rally was four rounds of production increases during the year that took the group's crude oil output to its highest level in 20 years - more than 29 million barrels a day (out of total production of 75m-80m bpd).
But, for much of the year, crude prices remained stubbornly above $30 a barrel, compared with an Opec target price range of $22-28 a barrel for its own reference crude.
This factor also led the US, the world's biggest oil consumer, to open its strategic petroleum reserve for only the second time in more than 20 years.
With some justification, Opec claimed that prices no longer reflected the true state of supply and demand.
Going into 2001, Opec's principal aim is to avoid another price crash.
This has led to another curious situation recently - prices remaining high and yet Opec warning that it might soon have to cut output.
The organisation's fear is that strong demand for heating oil in the US winter is keeping crude prices unjustifiably high. When the weather warms, prices will collapse, the argument goes.
December price falls
Some Opec members have already said they want cuts of about one million barrels a day in the first quarter of 2001, followed by a further one million in the second quarter if necessary.
The temporary exit from the market of Iraq from 1 December - due to an escalation of its dispute with the United Nations - appeared to put off the need for any immediate action.
But a steep fall in crude prices in mid-December - to about $26 a barrel - made the debate more urgent.
Many analysts agree that, with oil at those levels, Opec will have to cut back early next year if it wants to avoid prices dropping out of its $22-28 a barrel preferred range.
Others maintain that Opec is overstating the case for supply outstripping demand.
But the uncertainty about future direction of oil prices will add to the difficulties faced by economic policymakers around the world.
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