Is Cheap Oil a False Alarm?
By Jane Han
Staff Reporter
Are you going to be paying 2,000 won or 1,200 won for a liter of gas next year? What about $140 in airline fuel surcharges or just $40? It all depends on how crude prices shape up in the New Year, but it's a tough call to make now as experts are having trouble pegging a figure.
Analysts and experts are all over the place with their forecasts, mainly because of the uncertain economy and the force of speculative capital, which could easily spike or drag down prices in a short matter of time.
The good news, however, is that the days of $100 or more for a barrel of oil is out of the picture for 2009. Or at least it is now, based on current global forecasts, which range from $40 to $80.
This is a sharp turnaround compared to the prices seen through much of this year. Crude peaked at $147.10 a barrel at one point in July, but prices have shed more than 70 percent over the past six months, bogged down by worsened economic prospects, dwindling demand and a cool off in the construction boom in developing countries.
In the New York Mercantile Exchange (NYMEX), Thursday, the West Texas Intermediate, a light sweet crude traded in the U.S., closed at $36.22 a barrel, the lowest since July 2004. On the same day, Dubai crude ― South Korea's main imports ― finished at $42.45, its lowest since March 2005.
As the figures represent, crude prices tumbled despite record cuts announced by the Organization of Petroleum Countries (OPEC) earlier this week, which demonstrates how devalued oil is.
The coalition of oil-producing nations that pump 40 percent of the world's crude said that it would slash its daily output by 2.2 million barrels from current levels to stem the recent collapse in crude prices.
However, the response wasn't impressive, as experts generally agree that demand rather than supply is ruling the market.
Bulls Out, Bears In
``Production cuts, economic outlooks, investor sentiment, consumer confidence and many others factors play into setting crude prices,'' said Lee Moon-bae, a research fellow at the Korea Energy Economic Institute (KEEI). ``Right now all these factors are working against oil prices.''
The state-funded think tank expects average oil prices to stand at $66.6 a barrel, but bets that crude will surge past the $70-mark in the fourth quarter of 2009.
In the same ballpark as KEEI is the Cambridge Energy Research Association (CERA) estimate, which falls in the $66 range. It also says that the highs will surpass no more than $80 per barrel.
On the more pessimistic side is the Center for Global Energy Studies (CGES), which speculates that London Brent crude will crash to below $35 in the first quarter of next year with an average annual price of $41.
Goldman Sachs has also slashed its 2009 forecast for West Texas Intermediate crude oil to $45 per barrel, which is down 40 percent from its earlier outlook.
The U.S. investment bank also backed off from its oil ``super spike'' theory that said crude will surpass $200. There was no spike; prices only plummeted.
But ``scary'' forecasts like Goldman's earlier this year had many companies on their toes, keeping them anxious about how big of a blow surging oil prices will deal to their businesses.
Firms that are sensitive to oil price fluctuations tried to seal forward fuel oil contracts. Similar to the futures contracts, forward fuel oil contracts are traded for delivery of oil on a future date at a pre-agreed price.
These strategic methods, however, have put companies, particularly in the airline and oil industries, in a deeper pit worldwide.
Domestically, the nation's second-largest refiner, GS Caltex, suffered from disadvantageous contract terms. Buyers typically have two options to set purchase price ― either based on the market price at the time of shipment or arrival.
GS Caltex, concerned that prices will shoot up, agreed in the summer with its trade partners that the purchase value would be set at the time of shipping. However, crude prices spiraled down for three consecutive months, so by the time the shipment arrived in Korea, the refiner was paying much more than it could have.
This, plus the weak local currency, led the refiner to swing to a heavy net loss in the third quarter.