Confusion surrounds the global oil market as recent reports released by two leading global agencies EIA and IEA suggest a paradox of slow economic growth will dictate oil prices. Oil prices have receded from the highs of the beginning of 2011 and have stayed range bound for much of the past two months as the market still searches for a clear direction.
The price dynamics seem to have shifted the focus from supply side constraints to demand side pressure as there seems to be a growing consensus on the US and global economy slowing down considerably. Oil prices rebounded last month from the lows of $76/bbl after the Feds announcement of keeping the interest rates near zero till 2013.
But that alone does not have the strength to take oil prices northwards as worries over sustainable global economic growth have intensified of late. The EIA has dramatically revised its price and demand estimates downwards in its recently released Short-term Energy Outlook - now expecting the US economy to grow by 1.5 percent this year, significantly reduced from 2.4 percent predicted in the previous outlook.
The technical chartists too opine that if oil prices cannot break the $90/bbl barrier, it will be sooner than later that they recede to $80/bbl especially after the recently released reports.
That said, there is still a sense of uncertainty amongst the market followers as the oil price has shown vulnerability to various shocks to geostrategic and economic conditions. The EIA is adamant that the crude oil prices still face upside risks particularly due to the ongoing unrest in oil producing nations and a possibility that non-OECD demand will be more resilient than anticipated.
However, it is the downside risks which seem to have a greater possibility of prevailing, as the global economic recovery seems to be facing one obstacle too many; the European Union debt crisis and the rapidly diminishing inventory levels to name a few.
On the supply side, the EIA expects the production from Libya and Yemen to bounce back gradually, which will be enough to make up for an expected slump in Russian production. However, the US inventory levels are on a five-year low, which may still keep the oil prices from a freefall. ""The supply gap is becoming increasingly apparent in reported stock holdings, with total OECD commercial oil stocks falling below the five-year average for the first time since the recession", reads the IEA Outlook.
Where are the oil prices heading is anyones guess but the general market mood indicates another couple of months of a tight range-bound movement. That could at least provide a breather for the economic managers of Pakistan who may not have to make tough decisions in such a time when the government is facing tough scrutiny on political grounds.