The optimistic outlook of the world economic recovery is a major factor driving the rebound of international oil prices in the first half of this year.
Experts say, however, that the price boost may be attributed more to current market operations than actual growth in demand.
After dramatic ups and downs last year, oil prices saw a quick rebound from January to June of this year, with prices of the Organization of Petroleum Exporting Countries (OPEC) rising to 67.97 U.S. dollars per barrel in the last week of June. That was almost double the price of less than 35 dollars at the end of last year.
Notably, OPEC's monthly oil prices from May 9 to June 9 surged 11.38 dollars, the biggest monthly rise in 10 years.
DEMAND STILL EXPECTED TO DECLINE
Positive signs were seen in some economic data in the first half of this year in industrialized countries like the United States and Germany.
However, it is indisputable that the world economy is still fragile, that world trade remains weak and energy consumption continues to decline.
OPEC again lowered its expectations for world crude oil demand for 2009 by 1.89 percent in its monthly report in June. The report said demand in Western European countries would drop by 2.72 percent, while demand in North America would decline by 3.72 percent.
At the end of June, the International Energy Agency also lowered its mid-term expectations for crude oil demand, which is predicted to be 87.90 million barrels per day in 2013, 3.3 million barrels, or 3.6 percent, less than the forecast made in December.
PRICE SURGE ATTRIBUTED MORE TO MARKET OPERATIONS
Joel Fingerman, president of Chicago-based energy consulting firm Oil Analytics, believed that the continuing rise in oil prices was not due to changes in the supply-demand relationship, but to a larger extent because of responses to financial market operations.
"More and more investors gave up U.S. dollars due to the Federal Reserve's continuing interest rate cuts, the weak dollar and the volatile financial market, and turn to dollar-denominated staple commodity futures such as oil and grain so as to avoid risk," Fingerman said.
"The inflation expectation caused by the low interest environment also boosted the oil prices higher," he said.
Fingerman noted that when oil prices rose to their half-year peak, the dollar-euro exchange rate also dropped to its half-year bottom.
Sebastian Kummer, head of the Department of Logistics at the Vienna University of Economics and Business Administration, said "the present rise in oil prices and the active stock market seem to be a signal that the economic crisis has bottomed out, but existing data shows that the economic activity remains well below the level of one or two years ago in the world major economies."
Kummer said the United States and many European countries have invested a great deal of money to stimulate the economy and that in turn increased their debts. These countries then would print more bank notes, inevitably leading to inflation, he said.
"If the currency loses real value, only commodities will have real significance. This is, of course, clear to the investors," Kummer said.
Many economists in the West doubt whether the worldwide economic crisis would really soon come to an end. As a result, they believe the current crude oil market lacks enough support.
Oil prices halted at 70 dollars recently and even showed callbacks, which also reflected the lack of further driving forces.
OPEC MAY CUT PRODUCTION, SPARE CAPACITY ENOUGH TO MEET DEMAND
The production policies of OPEC, which supplies about 40 percent of the world's crude oil, will definitely play a crucial role in deciding prices.
Since the beginning of this year, OPEC officials generally showed dissatisfaction with low prices but they decided to maintain the same production level in March and May in a bid to avoid worsening the world economic crisis.
Even though oil prices have kept increasing recently, OPEC continues to express more and more dissatisfaction with current price level.
Oil prices should be higher, and "even 80 dollars per barrel would not disturb the world economic recovery," OPEC Secretary General Abdalla
Salem El-Badri said in late June. He said the current price level would not be able to support re-investment in the crude oil industry.
In order to create opportunities for world economic recovery, OPEC has maintained its production level twice, but the organization's ministerial conference in September will try to adjust the current oil output policy, he said.
Jose Maria Botelho de Vasconcelos, OPEC's rotating president and Angolan oil minister, also said oil prices should reach 80 dollars per barrel.
These statements may imply another production cut by OPEC, which made three production cuts in the last four months of 2008, slashing a total of 4.2 million barrels per day.
However, OPEC's actual spare production capacity may be greater.
The New York-based Energy Policy Research Foundation estimated that oil production in Iran, Venezuela, Mexico, Nigeria and Iraq dropped last year by 5.3 million barrels per day due to unrest and economic sanctions.
Some analysts even estimated that as of May, OPEC's spare capacity has reached 6.2 million barrels per day, amounting to 7.4 percent of the world oil demand.
Although not all potential production capacity can be fully tapped due to factors such as war and unrest, OPEC's enormous potential production capacity can, to some extent, serve as a "buffer" that helps prevent sharp oil shortages.
In this regard, Badri noted that "even if the economy recovers, we have enough oil to meet the increasing demand. No matter how much the world demands, we are now able to provide."
As OPEC further cuts the oil supply and a largeamount of "hot money" flows back to the commodity market, oil market speculation in the near future may focus on the bottoming out of the economic recession and the pressure imposed by previous low prices on crude oil production capacity.
In addition, the geo-political crisis would also affect oil prices from time to time. When the world economy recovers and resumes its pre-recession growth rate of about 3 percent, international oil prices may rise substantially.
Source:Xinhua
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