FocusOil volatility remains problem year after peak - US analysts

10 July 2009 20:10  [Source: ICIS news]

HOUSTON (ICIS news)--One year removed from the all-time peak of crude oil prices, a new wave of bureaucratic market vigilance is gathering momentum, but a cure for volatility in commodity values is still elusive, sources said on Friday.

"The lesson to be learned is that governments will be much more proactive in the future to limit the factors that contribute to the asset inflation in a bubble-like way," said Addison Armstrong, head of market research for Stamford, Connecticut-based Tradition Energy.

David Pursell, managing director at Houston energy investment firm Tudor, Pickering, Holt & Co., said it is going to be difficult to identify who in the crude oil market is speculating on price and who is not.

"Calling someone a speculator is like calling a dog a non-cat," he said. "It's accurate, but non-descript."

NYMEX light sweet crude futures settled at a record high $145.29/bbl on 3 July 2008 and hit an intraday peak of $147.27/bbl eight days later.

A spectacular collapse followed, and five months later the futures price bottomed out at $31.06/bbl on 22 December. 

Crude oil prices closely correlate to values in global petrochemical markets, especially in the aromatics chain.

Armstrong said last year's run-up in crude was a "black swan event" and does not represent a "new normal".

Underlying market fundamentals did not justify the hike in crude values, he said. Rather, oil was caught up in the unbridled surge of other markets worldwide, including agricultural and mineral commodities, equities, and real estate.

"Everything was overvalued," Armstrong said. "As a result, everything corrected at once."

Pursell said that the market last year truly demonstrated that crude prices do not depend on demand.

"What you learn is crude can go a whole lot higher than you think," he said. "Demand is resilient to a certain price point, and beyond that point it's not very resilient."

Armstrong characterised the recent jump in crude prices as a "mini bubble" that mirrored what happened last year. Crude rose through $50/bbl in May to peak at $72/bbl in mid-June, and has now fallen back below $60/bbl. 

Market perception had been that recuperation from the global recession would be V-shaped, but the pervasive sentiment has shifted to an L-shaped recovery, he said.

The fall in crude oil prices over the last two weeks - from $71.62/bbl on 29 June to below $60/bbl today - will represent the sharpest two-week price decline this year.

The mercurial movement in oil pricing has stirred up talk of regulation worldwide.

In an opinion piece in The Wall Street Journal this week, UK Prime Minister Gordon Brown and France president Nicolas Sarkozy urged governments to establish stronger oversight in energy trading.

"Discussions should look again into the question of whether trading activity is amplifying erratic price movements," the op-ed piece said. "Governments can no longer stand idle. Volatility damages both consumers and producers."

The US Commodity Futures Trading Commission (CFTC) said on Tuesday it will hold a hearing this month to determine whether it should set speculative limits on the trading of natural gas, crude oil and other energy products.

The detail of trading regulation is in its infancy in the US, Armstrong said, but it is something that is coming as a result of last year's inflated energy prices.

"Part of the drumbeat out of Washington is for better regulation," he said. "This administration has the political will, and they have a mandate to do this."

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By: Ryan Hickman
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