(MENAFN - Arab News) What a sharp contrast indeed! Markets sentiments have changed drastically over the last few weeks and oil markets, like in fact any other market, are largely influenced by sheer sentiments.
Barely a few weeks ago, it was the soaring prices that were gripping the world's attention.
Saudi Arabia and other oil producers were literally on the firing line for not opening up the taps, as desired by some in the West.
Now almost all of a sudden, prices have started to decline, with oil markets losing almost 20 percent since their peak attained on July 11.
One vividly recalls that in the immediate aftermath of the Jeddah Energy summit on June 22, when Saudi Arabia announced increasing the output by another 200,000 barrels per day, not many people at the Hilton in Jeddah that evening seemed convinced and satisfied. Many accused it of doing too little, and that it would have no effect on market. In fact Riyadh received a fairly bad press on the issue.
However, one dissenting voice was from non else than the old guard, Sheikh Zaki Ahmad Yamani, when he argued in an interview that for the additional Saudi crude to reach the markets and dampen the bulls somewhat, needs at least 40 days. And that now seems to be the case. Output is up and has impacted the markets already. As per a recent Platts survey, the Organization of the Petroleum Exporting Countries' (OPEC) 13 members boosted their collective crude oil production by 300,000 b/d in July to average 32.77 million b/d over the month.
Other factors, the nonfundamentals, are also contributing to the softening of the markets, underlining once again that opening the taps may not have done the trick Weakening demand is also starting to impact the demand-supply balance.
Signifying the changing dynamics, reports from China said its crude imports unexpectedly fell 7 percent in July to a seven-month low in the steepest monthly drop since January 2005. Consequently as China reported less crude imports, oil prices fell considerably earlier the week, outweighing in the process the concerns over supply disruptions stemming from the conflict between Russia and Georgia. The drop in Chinese imports added to wider concerns about demand. Within the energy fraternity, there is now an increasing mention that demand in China might not grow at the same rate that has been the case over the past couple of years. Rising demand from China and other developing economies were seen mainly responsible for the six-year rally that drove prices up sevenfold to their peak in July. And China is not alone in this emerging trend. Consumption in the United States and other developed economies has, in the meantime, apparently due to high market prices.
US petrol demand fell for a 15th consecutive week, as motorists coped with high prices by driving less, a MasterCard report showed last week. A jump in US crude and other fuel stockpiles, reported earlier the week, also helped in strengthening beliefs that high energy prices are eating into demand. The fall came as the services industries throughout the US and Europe shrank for a second straight month in July.
Meanwhile, the strengthening dollar has also impacted the crude markets, forcing speculators out of the commodities and taking positions elsewhere. And oil has not been the only commodity to have witnessed a bearish outlook. Other major commodities from gold to grains are also in the same loop, losing their luster to the speculators, indicating the changing dimensions of the global financial markets. On August 3, the UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials fell 3.5 percent, its biggest loss since March. Interestingly, Lehman Brothers in a recent report also emphasized that the speculator interest, which had added to crude's bullish run this year as investors bought commodities to hedge against rising inflation and the week dollar, was shifting.
"From a high near 130,000 contracts (on the New York Mercantile Exchange) long last year, net length has declined and even gone into net short territory in recent weeks," the bank said. "Whether due to the attention of regulators, or because of a different read on fundamentals, speculators have certainly changed their sentiment," the report added. Monetary conditions also appear fading away reducing oil's appeal to investors. The strength and tenacity showed by dollar in recent weeks against major global currencies have definitely contributed in the oil receding in its appeal as an inflation hedge. Earlier the week, the US dollar traded near a seven-week high against the euro, and was near its highest versus the yen in more than a month.
The changing crude sentiment once again raises the basic question: were the fundamentals, as claimed by everyone — from Samuel Bodman to Fatih Birol — really were to be blamed for the crude hitting unprecedented heights earlier in the year?
If the recent trends are any indication, it gets obvious that Ali Al-Naimi and his colleagues may have the last hurrah — for it is getting apparent now that the Nonfundamentals that dragged the markets to unprecedented heights are bringing the markets back to senses — finally. Fundamentals have not changed much in the intervening weeks since July 11. After all most of the factors mentioned above are not really related to the fundamentals — let's finally concede. And perhaps one could underline, with emphasis added, that nonfundamentals have been in charge of the markets for last many months now.
However, irrespective of that debate, for a change, let's enjoy the emerging scenario. From King Abdullah to Al-Naimi, no one approved of the bulls controlling the markets. And what a magnificent transformation indeed!