For those who suspect that crude prices were unusually volatile in 2004, Paul Horsnell of Barclays Capital Inc., London, has a simple explanation: they were.
"There has been a significant increase in price volatility, both within and between trading days," said Horsnell in a pre-Christmas report. "Over the past 3 months, crude oil prices have moved in five exaggerated swings, in broad sweeps taking West Texas Intermediate from $45[/bbl] to $55, back to $45 and then up to $50, down to $40, and now back above $45. So far this year, the daily trading range for WTI has been $1[/bbl] or more on no less than 142 trading days, compared [with] 121 in 2003, 71 in 2002, 18 in 1999, and just 7 in 1994."
'Wild cards'
What's more, Horsnell doesn't see any significant change in that pattern going into 2005, thanks to four "wild cards"—Iraq, Russia, China, and weather.
In 2004, Iraq was a continual source of bad news, culminating in late December with a call by Al-Qaeda head Osama bin Laden for terrorist attacks on Middle Eastern oil infrastructure, followed by one of the deadliest days in the Iraq war, the Dec. 21 attack by a suicide bomber at a military base near Mosul that killed 24 soldiers and civilians and wounded more than 60 others.
Any optimism that Iraq will manage to step up its oil production during 2005 "requires the assumption of some movement towards a political normalization and some reduction of attacks on the industry that will allow it to concentrate more on improvement and less on merely fire-fighting," Horsnell said. Instead, he cited suggestions by members of the UK Parliament that foreign troops will have to be deployed in Iraq "for at least another 10 years."
Horsnell also expects problems with Russian oil supplies. "The main concern regarding Russia is whether the expected deceleration in output growth might turn out to be more dramatic than is currently assumed," he said. "Recent output data [have] been weaker than expected, and we wonder if the application of the brakes on Russian output might be happening a little earlier than was first expected."
He noted, "Without the fast pace of Russian output growth over the past few years, we believe there would have been a major supply crunch in oil in 2003 by the latest." Even now, said Horsnell, "The timing of a potential Russian slowdown is not fortuitous."He questioned "whether Chinese demand growth will slacken more or less than Russian supply growth. If Russian output slows and Chinese demand does not, then there will be extreme tightness."
China's demand grows
Unlike the International Energy Agency in Paris, Horsnell sees "no sign of easing" China's demand growth. "In fact, if anything, it is speeding up. The November data imply that Chinese oil demand has moved well above 7 million b/d and is now growing at the fastest rate this year. The sum of crude and oil product imports has reached 3.5 million b/d, a year-over-year increase of 1.5 million b/d."
He concluded, "With our two supply-side wild cards looking to produce weaker outcomes and our demand-side wild car getting stronger, the chances of a backdrop that would support stronger prices next year do appear to be increasing."
Weather impacts markets
Near-month natural gas futures prices fell consecutively Dec. 20-23 on the New York Mercantile Exchange because of revised forecasts for milder winter weather. "The arrival of frigid Northeast temperatures this week coincided nicely with the official debut of the winter season...but the performance was short-lived," said Ronald J. Barone, UBS Securities LLC, New York, in a Dec. 23 report.
However, snowstorms lashed much of the US over the Christmas weekend, triggering power outages and stranding travelers. Some inches of snow fell Christmas Eve in Houston and other parts of South Texas that hadn't seen snow in 80 years or more. It also brought memories of the hard freeze in 1989 that disrupted natural gas production in Texas and some neighboring producing states and curtailed shipments of petroleum products to the Northeast.
Meanwhile, rescuers reported more than 22,000 people were killed in 10 countries Dec. 26 after a magnitude-9 earthquake—the world's most powerful in 4 decades—struck beneath the Indian Ocean off the coast of Indonesia. The quake triggered towering tsunamis that crashed into the coasts of several Asian countries, resulting in widespread death and destruction. There was no immediate indication of whether production of oil and natural gas was disrupted in that region or the potential impact on those markets.
