Crisis of Money Markets Reduces Oil Prices
Walid Khadduri Al-Hayat - 19/08/07//
In the last several weeks, the drop of around 7-10% in international money market indicators in the last three weeks, due to the mortgage crisis in the US, has led to a roughly equivalent fall in oil prices. The price of Brent North Sea oil has hovered between $70-78 a barrel, and fell for a time to $68. This reduction is considered quite limited in comparison with previous experiences, when the price of crude oil fell to low levels due to international economic factors.What is the relationship between money markets and crude oil prices?The price of oil has fallen because investors and speculators have pulled money out of the oil market, due to the need for financial liquidity to cover losses in money markets. The wave of falling prices was likely to have continued, were it not for the beginning of the storm season in the western Atlantic and the spread of storms to the Gulf of Mexico and the southern coast of the US. This is where many sea and land oil fields are located, along with the most important ports for importing oil to the US. American weather observatories are expecting that Erin and Dean mark the beginning of a series of storms expected over the coming weeks. We have actually begun to see some companies begin closing their sea platforms and halting production from the Gulf of Mexico, as the firms move their workers and engineers to safe areas on dry land. For example, Shell has done this, halting the production of 50 million cubic meters of gas in the Gulf of Mexico; it evacuated some of its employees from sea platforms that are located in the path of the two storms. These developments have warned investors and speculators that the price of oil could rise once again, soon, especially because prices have yet to be greatly affected by financial developments and fall to low levels.A fire that broke out in an important refinery in the southern coast of the US, political and security news out of the Middle East, and news about the US' intention to put Iran's Revolutionary Guards on the list of terror organizations (meaning an escalation of the confrontation between the two countries, even if at the political and economic levels) all helped halt the slide in oil prices. This announcement about Iran, if it is implemented, will hinder the implementation of some important Iranian oil projects, while it will boost the type of danger of an expected confrontation between Washington and Tehran. Iran's Revolutionary Guards own a number of companies and some of them invest in the oil sector. The Guards are partners with foreign firms in developing the gigantic South Pars gas field; any boycott of these companies will mean confrontations of a new kind.Meanwhile, the news out of Iraq is getting worse. The kidnapping of an Oil Ministry official (responsible for exploration and Iraqi production) from one of the most important oil institutions in Baghdad, along with four director generals from the Ministry, is not encouraging for the possibility of seeing stability return to the country in the foreseeable future, no matter how much US President George Bush tries to polish up the picture of what is taking place in Iraq. Moreover, the incident, which was carried out by about 100 fighters dressed in police uniforms and using official government vehicles, will certainly act as a deterrent to international oil companies that want to send their employees to Iraq in the near future, if the Iraqi Parliament approves the new Oil Law, despite the huge quantities of reserves that are available in Iraq.At the same time, OPEC continues to insist on its position and affirm that there is no gap in supplies, and that the level of commercial oil reserves in industrial countries is quite reasonable, since it lies with in the average of the last five years (in the US alone, for example, there is more than a billion barrels of crude oil and oil products in the commercial reserve, which is 30 million barrels higher than the average of the last five years, according to the a statement last week by the Department of Energy). The OPEC Secretariat, in its most recent monthly report, revealed that there are now fears about the likelihood of a fall in international demand for oil in the remaining months of this year, due to the fall in value of international stock markets. This is a new factor that will deter OPEC states from deciding to increase production at their regular ministerial meeting on 11 September in Vienna. However, the final decision about this vital matter of oil prices in the coming phase (whether OPEC retains its current level of production at around 30 million barrels a day or increases it) won't be taken before the Vienna meeting.
*Specialist in energy affairs.