Oil market swing shows why analysts need the asterisk

July 16, 2012
The asterisk fixed to oil market analysis has asserted itself again. Twice.

The asterisk fixed to oil market analysis has asserted itself again. Twice.

Any utterance about future developments in oil supply, demand, and price carries an implicit asterisk alluding to a disclaimer: Surprise disruptions to supply can demolish any forecast at any time.

Surprises disrupt the oil market regularly. The asterisk exists for good reason.

An increase in the price of crude oil that began in the Northern Hemisphere autumn of 2011 ended at the end of winter. The West Texas Intermediate Cushing price peaked at $108.39/bbl on Feb. 24, the Brent spot price FOB at $128.14/bbl on Mar. 13.

Prices drifted downward until late in June. Market fundamentals were weak. Demand was sluggish. Inventories were rising. European economies were teetering. The Chinese economy showed strain. A dollar strengthening against the battered euro damped oil prices further.

Brent reached its recent low point of $88.69/bbl on June 25, WTI at $77.92/bbl on June 28.

Then the asterisk reasserted itself in two ways.

Sanctions targeting Iranian finance by the US and Iranian oil shipments by the European Union took formal effect in late June and early July. In prospect for 6 months, neither development was a surprise. But instead of backing away from its nuclear ambitions, the aim of the sanctions, the Islamic Republic revived its threat to limit tanker traffic through the Strait of Hormuz.

At the same time, three labor unions began strikes against operations offshore Norway. By July 5, the lead negotiator for oil companies and service firms had called a lockout for midnight July 10.

The Norwegian offshore produces about 2 million b/d of crude oil, NGL, and condensate. As much as 17 million b/d passes through the Strait of Hormuz.

Heightened risk of disruption to that much oil supply never fails to get the market's attention. By July 3, the price of Brent had bounced to $99.89/bbl, of WTI to $87.74/bbl.

Lesson: When pondering the oil market, never forget the asterisk.

Footnote: The market remains weak.

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About the Author

Bob Tippee | Editor

Bob Tippee has been chief editor of Oil & Gas Journal since January 1999 and a member of the Journal staff since October 1977. Before joining the magazine, he worked as a reporter at the Tulsa World and served for four years as an officer in the US Air Force. A native of St. Louis, he holds a degree in journalism from the University of Tulsa.