Oil Markets & Prices Quarter 1 2007

Following on from Q4’s plummeting oil prices, Q1 saw continued price falls to a level 35% below the peaks of July 2006. This was largely down to continuing warm weather, which allowed fuel inventories to build and encouraged investment funds to exit the oil market. Analysts estimated that the “synchronous global warm winter weather” had reduced oil demand in OECD industrialised countries by 300,000 barrels per day (bpd) in December and cut back January demand by 600,000 bpd. In total during the first half of the winter, OECD demand dropped by 38 million barrels relative to the seasonal norm.

By mid-February, the market did begin to pick up as it eventually found support from investors who were reluctant to bet that prices would fall much below the $50/barrel mark. Prices were also supported by cold weather, which finally arrived in the US North East. Adding to the rising demand pattern, America also released news of it’s plan to add 11 million barrels of oil to the country’s Strategic Petroleum Reserves, which in the short-term drove demand levels up.

No further significant rises have taken place since this point despite continued colder weather in the US. Europe has remained abnormally mild and most traders have concluded that winter is now over and with high stocks built up earlier in the winter, the feeling is that supply will comfortably cope with any demand spikes.

In fact, this bearish sentiment has negated supply concerns over escalating violence in the Niger Delta and outages at US refineries. Even the confirmation that Iran had defied the UN Security Council’s 60-day deadline to halt Uranium enrichment has not radically affected prices. However there are some jittery signals in the market and the recent financial market crashes could push investors to the safe haven of oil, thus pushing prices back up.

As a footnote, it is worth commenting on the volatility of the market over the last few months. Since the world-record highs of July 2006, prices fell to a 20-month low in January 2007. For the Bayford trading team, blessed as they are with steely nerves and an ability to call the market, such volatility is all part of the job. However, for those without the trademark Bayford vision, this has been a nerve-racking and often painful roller-coaster of a ride!