News
Oil Market Update - 3rd Quarter 2008
Wednesday 22nd October 2008
The trend we saw in the second quarter continues into this quarter, mainly caused by concerns over the global financial market and the weak dollar. The hurricane season remained active from the beginning of June through to the end of November, which caused oil prices to firm briefly during July. Tensions in the oil-rich Middle East, i.e. Iran's nuclear programme, and unrest in Nigeria, provided underlying support on oil prices. It is concerning that attacks on the oil industry infrastructure supported gains and contributed 30% towards the oil prices this year.
As the IEA suggested, the world experienced its "3rd oil price shock" - the two previous oil crisis being the 1973 Arab oil embargo and the 1979 revolution in Iran. The pace of growth in India and China is slowing although demand is still upward, however high fuel prices began to hurt demand along with mounting global economic problems. Conflict between Russia and Georgia arose, which threatened a serious oil supply disruption supporting oil prices with signs of an escalation in tension.
However oil prices began to ease off as we entered the 2nd month of the third quarter. The rising dollar helped to push crude prices down as concerns over the fragile global economy continued after oil prices were boosted about 50% this year due to investors hedging into oil and other commodities. Although the US entered into its traditional summer holiday driving season, sky-high gasoline prices forced demand down during the peak season.
Evidence began to show there is a global cutback on consumption despite an easing of oil prices. UK economic growth slowed more sharply, as demonstrated in retail sales. There were indications that the British economy was heading towards a recession, with interest rates expected to fall below the current 5%, infused by the troubles in the banking sector. However rising prices in food and energy left the Bank of England reluctant to cut its interest rate from the current 5%, which could potentially stimulate growth in UK.
The oil prices continued to fall in September because of growing fears of a recession in the US and Europe. Prices had plummeted by 30% since mid-July after the recent soaring prices. OPEC reduced its output after the meeting held in Vienna this month, stopping the rapid decline in oil prices.
Towards the end of the third quarter, more troubles emerged in the financial market as a consequence of the credit crisis which had begun more than a year ago. Lehman Bros filed for bankruptcy protection, the US insurer AIG was saved by the US Federal Reserve by a rescue loan of up to $85 billion and Merrill Lynch was bought by Bank of America in an attempt to save the troubled company. Cash was been injected into the troubled banking system by major central banks as an attempt to calm the financial crisis markets.
By the end of the quarter, more adverse headlines hit the world. The bailout plan proposed by the US in order to rescue the financial sector failed to win legislative approval. This led to greater fears of depressed economic activity extending into next year, which could lead to weaker demand for oil and lower prices. It is certainly a turbulent quarter for the banking sector and the oil market, however should this trend continue into the next quarter. We will keep you informed in the fourth quarter review.