One Year After Oil’s Price Peak: Volatility

By Jad Mouawad
The New York Times
July 10, 2009

A year ago this weekend, oil prices reached a trading record of $147.29 a barrel. That peak followed months of speculation that oil prices would zoom past $200 or $250 a barrel — predictions often made by people with a major stake in seeing that happen, even as experts said they were puzzled that prices could rise so high, so fast.

Within weeks of the July highs, prices collapsed as the mortgage crisis in the United States morphed into a full-fledged economic and financial meltdown around the world.

Oil demand has dropped by nearly 1.5 million barrels a day since last year, and OPEC producers are now sitting on five or six millions of barrels of daily idle capacity. As the world confronted its worst economic crisis in over 50 years, oil fell to around $33 a barrel by December.

But prices remain as volatile as ever.

With oil rising above $70 a barrel, I wrote on Monday about big swings in the oil markets over the past 18 months (which also included this neat graphic).

The story ran a day before the Commodities Futures Trading Commission, the Federal government agency in charge of commodity markets, said it was considering regulating “speculation” in commodity markets.

Oil is now headed below $60 a barrel, and some major banks like J.P. Morgan Chase see prices headed to the low $50-range in coming weeks. The reason? While investors pushed up oil prices earlier this year in anticipation of a global economic rebound, reality seems to have set back in, and most people now expect a slow recovery.

But the volatility in the energy markets is unlikely to end soon. While one trader told me this week he was bearish for oil in the short term, he said that long term he was “extremely” bullish for oil. Most of the reasons that have pushed up prices in the past years — tight supplies, geopolitical risk in major producing countries, declining production in major oil basins like the North Sea and Mexico, as well as strong demand growth — have not disappeared.

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A note of clarification for statistical sticklers: The July 11 record of $147.29 a barrel was the highest trading level ever reached by oil. But in print, we typically refer to the highest settlement price at the closing of a trading session on the New York Mercantile Exchange. That was set on July 3, 2008, at $145.29 a barrel.