US optimism aids oil volatility

After dipping sharply with the Greek economy, oil prices have managed to find their way back up. It is not necessarily the shock and awe rescue package that has pumped life back in oil prices; rather it is the upward revision in oil demand and price forecast by the US Energy Department, EIA.
It is rare that EIA misses its mark while predicting the future path, but the latest Short Term Energy Outlook has raised serious concerns from various corners of the world.
Energy Information Administration of the US has based its upward revision in global oil demand on an improved pace of global recovery, raising the global GDP forecast to 3.6 percent, up from 3.3 percent in its last outlook.
Based on the assumption of a rapid global recovery, the agency forecasts that oil demand will increase by 1.5 million barrels per day against last years demand of 84 million barrels daily.
The Organization of the Petroleum Exporting Countries (Opec), on the other hand does not seem as optimistic as EIA, as it has taken a rather conservative route - predicting global oil demand to grow by 0.9 million barrels per day.
Oil prices, consequently, have been tipped to increase to $84/bbl for the second half of 2010, which is a $3/bbl rise from EIAs previous outlook. However, there are many energy experts who see oil prices dipping because it is based on abnormally high demand projections from US and China.
Despite comparatively conservative demand growth projections, Opec sees oil prices as high as $85.5/bbl by the years end, which has encouraged speculators to take long positions at record high levels - a perfect recipe for high volatility if anything goes against the script affecting global oil demand.
Chinas oil consumption has started easing as fears of an overheating economy are gaining strength, whereas US demand recovery is also considered short-lived by many quarters.
The panic amongst oil investors last week triggered high volatility in global oil prices, as the Greek financial crisis made oil expensive for euro holders. The impact of financial markets may still have a larger role to play in determining the magnitude of change in oil prices, more than the optimistically high projected oil demand.
"This strong volatility came despite the fact that crude fundamentals remain relatively unchanged and thus highlight the continued impact of financial market sentiment on crude oil prices," said Opec in its latest monthly oil market report.
EIAs oil price projection may end up being a case of oo-big, too-soon, as the clouds of uncertainty over the financial markets are still looming. It is time only for the daredevils to take positions in the black gold, given that volatility seems to be the flavour in the days ahead.