The oil price fell back sharply this week as the oil cartel Opec trimmed its demand forecast for 2011. It also emerged that Saudi Arabia had cut its production by half a million barrels per day last month. The International Energy Agency (IEA) and Goldman Sachs also said demand appeared to be faltering.
What the commentators said
“An ever-present danger in oil markets,” said James Herron in The Wall Street Journal, is that high prices sow the seeds of their own downfall as they undermine demand. “Very preliminary data” suggest demand is suffering, according to the IEA. It cited a fall in year-on-year demand growth in the developing world to 4.7% in February, from 8.4% in December. That is “reminiscent of 2008, when prices were last scaling to such heady levels”, it said. Goldman sees “nascent signs of oil demand destruction in the US”, while record petrol prices in sterling terms continue to squeeze British consumers.
Goldman pointed to record levels of speculative bets on oil rising further. That increases the scope for a drop in prices as traders exit en masse. Note too that global growth momentum will ebb as austerity bites in developed economies and China slows, said Capital Economics. Moreover, the end of the Fed’s money printing in June will remove one of the factors that has weakened the dollar and bolstered raw materials. Prices are back to levels seen in spring 2008, said Goldman. Today, however, the “supply-demand fundamentals are significantly less tight”.