International crude oil prices have fallen over 33 per cent from their recent record highs and are projected to fall further towards $90 per barrel with the second hurricane in the Gulf of Mexico not causing as much loss of production as was initially estimated.
Analysts expect oil prices to decline further in the next couple of months as production remains robust and demand for oil and oil products falls, especially in big consumers such as the US, China and Europe, in the face of global economic slowdown.
Various factors contributed to the doubling of oil prices between July 2007 and July 2008. Among these was what analysts call the "speculative premium". During this period, the demand for crude oil increased by around 2 per cent, while the supply increased by around a percentage point. Prices, however, doubled, which analysts say was due to traders pushing up rates.
"However, the speculative element seems to have almost vanished now," said Rohit Nagraj, research analyst at Mumbai-based Angel Broking. Between July and September this year, oil prices have tumbled over 33 per cent. In the same period, traders have sold crude oil futures worth over $39 billion in the US, the primary oil trading centre, Bloomberg News reported earlier this month.
Experts say this is the reason oil prices have not climbed in spite of Hurricane Ike the second hurricane to disrupt production of crude oil and petroleum products in the last two weeks threatening oil production units in the Gulf of Mexico. On the other hand, prices have dipped below $100 per barrel, the levels it crossed in April on its way to $147 per barrel in July.
"Oil prices now will be based primarily on demand-supply economics. That is why there has not been much fluctuation in oil prices despite Hurricane Ike," said Angels Broking's Nagraj.
Nagraj, as well as most other analysts, such as Khandwala Securities' Vinay Nair, project oil prices to hover at $100-105 per barrel during the rest of the year. Nair projects prices to fall to $65-70 per barrel in the next three to four years.
They also expect prices to fall further in the immediate future as Chinese oil imports have been falling and vehicle-owners are buying less petrol in the US, the world's largest consumer of crude oil.
China, the world's second-largest crude oil importer, saw its July imports falling to the lowest level since January 2005. The International Energy Agency (IEA) also cut its projection for the global oil demand by over 100,000 barrels per day for both this year and the next.
The IEA projects oil demand in 2008 to be 86.8 million barrels per day. Supply, however, is projected to be higher at around 88 million barrels per day.
"The Chinese built huge oil stocks before the Beijing Olympics. They are now using those and are importing less," said an official with Indian Oil Corporation, the country's largest crude oil refiner.
Saudi Arabia, the world's largest producer of crude oil and a member of the Organisation of Petroleum Exporting Countries, has indicated that it will continue to produce crude oil above the quota set by the oil cartel, which supplies 40 per cent of the world's oil.
"This shows that some Opec members want oil prices to be below $100 per barrel as they see that demand will not be eroded at that level," said another Delhi-based analyst.
Iranian Oil Minister Gholamhossein Nozari said crude oil prices were falling because of the rising value of the US dollar, Bloomberg News reported on Monday. "The most important reason for the fall of oil prices in world markets is the dollar's changing rate vis-à-vis other currencies," Nozari was cited as saying by state-run Shana news agency on Sunday.
Crude has declined 33 per cent in the last three months even as the dollar gained about 11 per cent through to the end of last week since touching an all- time low of $1.6038 per euro on July 15.
A stronger dollar reduces the attractiveness of dollar-denominated commodities such as crude oil.
