Reduced Oil Demand Levels-off Prices

The upward direction of oil prices seemed not to let just a few weeks back.  But last week’s market developments showed that the dramatic energy rally seemed to have lost its momentum.

Dramatic Market Changes Push Oil Down

A 21% decline in oil prices was seen as a direct result of changing market perception, weak global economy, and reduction in global demand.  Prices continue to tumble at the trading floors notwithstanding threats of hurricane at the Gulf of Mexico oil wells, the war in Caucasus, and the continued violence in the oil-rich Niger Delta.

A few months back, such developments would pummel the global markets with skyrocketing oil prices.  The energy sector however has taken a closer look at how rising world crude prices could push global economic slow down due to reduced consumer spending.  

Oil Remains Expensive

The entire picture however is still far from rosy as oil prices remain high and become very volatile.  Oil prices have been stuck above the $100 levels the entire year which is a 19% upward movement.

Oil prices dropped on Friday to $114.59 per barrel posting a 5% reduction.  It was up 5% a day earlier.  The market reaction changed significantly according to James Crandell of Lehman Brothers.  Crandell saw the markets cling to negative news which was easily disregarded in the past.

Predicting the Direction of Oil Sector

The view on where the oil market will be headed is subject to debates.  One sector saw current oil price decline as temporary event and will rise again as the global economy recovers.

Other analysts predict a shift in consumer spending patterns and saw car owners shifting from gas guzzlers to more economical small car models.  In this way, energy spending will likely to go down permanently.

The remaining enigma is whether the oil market prices will go down significantly to ease up the economic crunch or will it remain high to encourage more energy investments and to push people to find alternative sources of fuel.

Finding the Right Price Equilibrium

Normally, oil prices tend to flat line over long periods showing significant resistance to inflationary pressures.  The entire decade of 1990’s showed oil prices at a steady 20-25 dollars per barrel.  The stability of the oil sector is increasingly being subjected to close scrutiny as prices ranged at $90 - $150 per barrel today.  Michael Wittner of the Societe Generale of London said that the market is still finding the right equilibrium of the world oil prices.

The energy sector is predicted to hit bottom prices in September at $105 per barrel.  But analysts predict another rally next year as oil supplies will remain tight.  Wittner assessed that oil prices need to remain high in order to control the demand.