Rowena Mason: Why is the oil price still so high?
Four months ago, the world's energy watchdog took historic action to reduce oil prices. Since then, the financial outlook has considerably worsened and some Libyan oil has returned to the market. But the price has remained above $100 a barrel.
Releasing 60m barrels of reserves was meant to dampen the high price of $113 per barrel, attributed to lost ouput from war-torn Libya and worries that the Arab Spring could spread to more oil producers.
The International Energy Agency (IEA) made no secret of the fact it was worried that oil above $100 was unsustainable and damaging to the global economy.
Since then, the world's financial outlook has considerably worsened and about 430,000 barrels of Libyan oil have returned to the market.
Surely, amid the doom and gloom, plus extra production, the natural direction of oil ought to be down?
However, the price, though volatile, has remained stubbornly above the $100 level. And last Monday, Brent crude even returned to the $113 per barrel level seen before the emergency release of supplies.
Data on oil speculation also shows that more traders are betting on higher prices. At the end of last week, data from the US Commodities and Futures Trading Commission (CFTC) showed an increase in long positions in oil futures.
From a macro viewpoint, such continued support for oil doesn't appear to make sense given the number of predictions that the world is on the brink of another recession, tipped over the edge by a volatile eurozone.
From America to Europe, countries are struggling with sovereign debt. And even China is not immune, with demand for oil at its lowest level so far this year.
There is no doubt that the pace of consumption is slowing. Opec, the cartel of producers, the IEA, the Energy Information Agency and numerous companies all say the economic downturn is taking its toll on world oil demand.
This leaves the most plausible explanation for such high prices as tight supply, counteracting the economic gloom.
According to Bank of America Merrill Lynch, the extra culprits on top of Libya's lower output are North Sea maintenance and pipeline attacks in Nigeria.
Its analysts refer to "a string of supply shocks affecting Libyan, North Sea and Nigerian light sweet barrels. Some of the recent supply losses may reverse in the next few months, but only a global double-dip recession will be able to remove medium-term tightness in the seaborne crude oil markets."
Angola, a recent addition to the Opec cartel, has not been producing anywhere near the 1.85m barrels it pumped last year, with technical problems at some fields.
And Adam Sieminski of Deutsche Bank also mentions "slower than expected ramp-up of new production and unplanned outages" from non-Opec producers.
There is a similar picture in America, where stockpiles of its benchmark WTI crude are remarkably low. This has turned out to be a function of lower imports rather than increased consumption.
While supply remains problematic, only one thing is going to cause a collapse in prices – even lower demand in the face of a full blown economic crisis. It appears that the market is not pricing this in just yet.
Commerzbank, for example, says: "One reason for the striking resilience of the oil price could be that a package of measures to resolve the European Union debt crisis is now expected next Wednesday. We still see potential for disappointment if the big push does not succeed." In other words, the oil market is still holding out for a solution to Europe's debt woes.
Ole Hanson, strategist at Saxo Bank, thinks that the market is now at a crunch point, ready to go either way.
He says: "WTI and Brent crude also reached but failed to breach important resistance levels indicating that a prolonged period of range trading can be expected while we wait for further clues about the future demand situation."
It's a catch-22 situation for motorists suffering a UK petrol price just 3p per litre off its record high.
For the moment, lower oil prices are only going to come at the expense of lower growth – and nobody's rooting for a recession.
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Rowena Mason writes about energy for the Daily and Sunday Telegraph. Contact her at firstname.lastname@example.org or follow her on Twitter @rowenamason. Petroleumworld does not necessarily share these views.
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