G. Chandrashekhar

Mumbai, Sept. 11 On Thursday, for the first time in several months – March 24 this year to be precise – the front-month Brent crude breached the psychological $100 a barrel mark to close at $98.97 a barrel. At the time of writing, further weakness has set in and is quoted at around $96 a barrel.

All attention is now on Hurricane Ike which has been upgraded to category 2 storm and is moving towards the Texas coastline. According to reports, over 95 per cent of oil production in the Gulf of Mexico is shut. There are a number of large refineries whose run may be impacted by Ike.

Latest assessment shows crude oil stocks in the US are down 5.9 million barrel (considerably beneath 5-year average), so are gasoline and distillate stocks. Experts see these strong numbers as a developing product crunch in progress, and this is notwithstanding slackening demand.

According to Barclays Capital, in a demand-obsessed market, the crunch may take a while to register. Experts believe that the process of stabilisation and recovery will be a long one and will involve over-tightening of the market.

There is the possibility of slow evolution, involving immediate extreme weakness, a partial rebound and stabilisation, a period of flat-lining within a range, and then an over-tightening that adds to a sling shot up in prices in later 2009 is what Barclays perceives on current reckoning.

However, there are two risks to this outlook, Barclays has added. First, stabilisation may prove to be quicker as the current situation is far tighter than two years ago given the then large inventory overhang. The second is the Iranian situation that is very much a live one. Speculators on the futures section have exited the market for fear of precipitate action by the regulators. This has removed a large part of speculative froth. The market may now be moving to more realistic levels that are justified by demand-supply fundamentals.

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