Oil prices have hovered around $50 a barrel this month amid grim economic news - a climate of rising unemployment, weak consumer demand and falling corporate profits that has eroded investor confidence of an economic revival - but price movements in the futures markets suggest black gold could stage a recovery when the current slump ends.
Since climbing to a peak of more than $147 in July, 2008, despite the apparent paradox of weak sentiment in the underlying physical crude markets, spot prices - the cost of a barrel of oil on a particular day - have lost nearly $100 as the global economy weakened.
"Oil is being driven by perceptions about the economy, and there are plenty of obstacles to an international recovery," said David Moore, a commodity strategist at Commonwealth Bank of Australia. "It's going to be difficult for the next year."
Earlier this month, 10 cargo ships laden with enough fuel for about seven million cars had dropped anchor off the south Devon coast, rather than unload, because the price of oil remains too low.
This is part of a global phenomenon as oil tankers cruise the seas waiting for prices to ignite. The oil, destined for refineries and equivalent to 340 million litres of petrol, has been the subject of intense bidding from traders who want to make a profit by buying cheaply, to store and sell it later at a higher price. It is thought some oil-producing countries are trying to force a price rise by using tankers to withhold oil from the market.
Demand for petroleum products is set to fall this year, and will probably remain sluggish at best in 2010.
Just as importantly, the collapse in prices seen in the latter months of 2008 and the rapid deterioration in the economic climate are prompting oil companies to revise investment plans, with signs of reduced budgets and delayed projects sparking fears of a possible shortage of supply. Shell, BP and some other companies have trimmed investment on some key offshore projects and oil sands extraction in western Canada.
Towards the end of the first quarter, crude prices remained relatively calm, albeit at a level which most in the industry insist is too low to encourage the investment in future capacity which will be needed once the world economic activity picks up again. The Opec cartel has reasserted some semblance of control over prices after slashing production by a record amount since late 2008. Prices remain lower than its members would like, but are perhaps better than they feared they might be three months ago.
Spot prices attract most of the attention of investors and consumers but they tell only part of the story.
Recently, however, the price movements in some far forward contracts have been more dramatic, with prices hovering at a five-month high of about $80 a barrel. The West Texas Intermediate contract, for delivery in December 2015, is a good example of what is going on in the futures market. This is a relatively liquid future used as a proxy for long-term prices. It closed a few days ago at just under $80 a barrel - the same level as 18 months ago. Spot prices, meanwhile, are at levels of four years ago.
Harry Tchilingurian, senior oil analyst at BNP Paribas in London, said hedge funds were looking at long-dated oil prices and eyeing call - right to buy - options at, or above, $100 a barrel.
The strength of forward oil prices reflects the concern that while the credit crisis has an impact on demand, supply-side forces will lag behind and become evident only from next year.
The Paris-based International Energy Agency, which acts as the oil watchdog for the Organisation for Economic Co-operation and Development, estimates that spending on exploration and production of oil this year is likely to drop by 20%, double the initial forecast. "Non-Opec project cancellations and slippage out of the 2009-2010 start-up horizon alone stand at one million barrels a day or more," it says, adding that supply losses could be even bigger as oil companies curtail maintenance in mature fields in the key regions of the United States, Canada, Mexico, the North Sea and Russia.
Price movements in the forward oil market indicate that when the economy starts to recover next year, oil consuming nations will discover that supply is falling and this will push prices sharply higher. It also reflects higher costs in areas such as deep water or oil sands and Opec's desire to lift prices towards $75 a barrel in the medium term.
The next meeting of the Organisation of the Petroleum Exporting Countries on May 28 will provide signs of where spot prices are going. Iran said this week that it will back a cut in Opec production at the meeting in May if the crude market was oversupplied.
"If there is an oversupply, Iran will naturally support an output cut," Mohammad Ali Khatibi, the Islamic republic's Opec delegate said on the sidelines of an oil and gas conference in Tehran.
"What is currently worrisome for Opec is the fact that inventories are building up, some are stocking oil and products because future prices will be higher, and they are doing it to make a profit," he said. Opec has reduced its oil production target by an overall 4.2 million barrels per day since September to 24.84 million bpd, the lowest since just after the US-led invasion of Iraq in 2003.
Iran, Opec's second-largest crude producer, favours a global oil price of between $75 and $80 a barrel and Opec hardliners like Venezuela also want prices to rise well above the current $45 to $50-a- barrel level.
