Sharp fluctuations in oil prices were witnessed during the first half of this month. Prices fell by about 15 percent, or near 17 dollars/bbl, in the first week of May, because of wide scale and extensive selloff of basic commodities, including oil, pushing prices down to below the level of one hundred dollar per barrel for a very short period of time. However, soon thereafter, oil prices rebounded, to resume their rise and reach their previous levels. Then, the OPEC crude basket price climbed beyond 111 dollars/bbl on May 10. It is likely that the reason behind these fluctuations is the concern for global economic health following the global financial crisis, especially in terms of economic recovery, in light of rising commodity prices. As known, the current period is witnessing considerable pressure on light low-sulfur crude, which Libya had been producing. Moreover, there is shortage in Yemeni oil exports, because of the bombing that targeted the main pipeline that carries crude oil from Marib to the Red Sea. Yet, despite these disruptions in supplies, there has been an increased oil production by non-OPEC oil-producers, estimated at an average of around 600 kbd in 2011, in addition to the fact that some OPEC countries have been tapping their surplus production capacities to compensate lost crude oil supplies in the markets. At the same time, projections indicate that global demand for oil may rise by about 1.4 mbd in 2011, compared to an increase of around 2.1 mbd in 2010. What also helps the high growth of demand is the sustained improvement in the Chinese economy and the repercussions of the earthquake in Japan. In addition, it is expected in the foreseeable future that the flooding of the Mississippi River in the United States would lead to a large shortage in gasoline inventories across the country, at the same time when demand for gasoline starts to rise with the beginning of summer holidays, when gasoline consumption reaches its peak, usually between late May and early September each year. In fact, the flooding of the Mississippi will cause a number of refineries located along the river in the south of the U.S. to stop working. There are approximately 11 refineries on the river between New Orleans and Baton Rouge, producing about 13 percent of the total output of petroleum products in the United States. It is known that the high prices of gasoline in the United States, which are currently hovering at very high levels (nearly four dollars a gallon), will in turn lead to higher prices for crude oil globally, because of the importance of the U.S. to the global markets. Indeed, we find that prices of gasoline futures rose by about 3.1 percent on May 9, because of the threats posed by the flooding of the Mississippi on refineries, navigation across the river and railway transportation. It is predicted also that prices will be affected, in the near future, by speculations and statements regarding OPEC's ministerial meeting on June 8 in Vienna, and by whether the organization will alter the output ceiling agreed upon at the Oran meeting in the autumn of 2008. This unleashed a string of often contradictory statements, reports and leaks about what is required of OPEC in terms of output in the next phase. In short, OPEC sources indicate that despite increasing prices, oil supplies are adequate and balanced, and the best proof of this is the level of U.S. commercial crude inventories which recently reached around 365 million barrels, an extremely high level. OPEC also purports that among the positive indicators of price stability are the surplus production capacity, the high levels of commercial crude oil inventories, and the decreased demand for OPEC's oil. As regards the consuming countries, there is fear of sustained high prices and their effects on economic growth in these countries. There are expectations that fluctuations in prices would continue. Hence, OPEC's ministerial meeting early next month will constitute an important milestone in the future march of oil prices. *. Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)
