By Myra P. Saefong, MarketWatch
SAN FRANCISCO (MarketWatch) — Crude-oil’s spike to a price peak of nearly $114 a barrel by the end of April was almost as impressive as its recent two-month dip but to market experts, it all makes sense — and there’s more volatility to come.
“The volatility in the energy sector has been extreme in 2011,” said Kevin Kerr, editor of Kerr Commodities Watch. “Currency upheaval, unrest in the Middle East and fears of a global economic slowdown have all caused prices to act very erratically. Traders can expect this to continue.”
After ending last year around $91 a barrel, crude-oil futures CL1Q -0.79% peaked at nearly $114 a barrel on April 29 to score a gain of about 25%. They dropped to around $95 by Thursday, down 16% from the high.
CL1Q 94.67, -0.75, -0.79%
August crude prices
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“Oil prices simply got away from themselves earlier this year,” said Matt Insley, editor of the Daily Resource Hunter. “Clearly, there was some speculation that turmoil in the Middle East, starting with the uprising in Egypt, would eventually have a major effect on oil output.”
But “the worst-case scenario never panned out,” he said.
In early March, investors were already wondering how long the triple-digit prices for oil would last because prices hadn’t seen such levels since 2008. Read a story from March about $100 oil.
At the time, protests in the Middle East and North Africa were raging. While there are new developments in the region each day, the turmoil is far from ending and in Libya the battle for leadership and the ouster of Col. Moammar Gadhafi continues.
What’s actually changed to drag oil prices lower is a surprise decision by the International Energy Agency to release 60 million barrels of oil from reserves and concerns about weaker oil demand, as global economies struggle and Greece paves the way toward a financial bailout.
“Oil prices initially lost momentum on concerns about the sustainability of oil demand in the face of cracks that have started to appear in the global economy,” said Matt Parry, chief economist at KBC Energy Economics.
Greece’s financial woes have been in focus for months and “it’s not all milk and honey in the U.S., Japan or Korea, whilst even the rapidly expanding emerging market world is starting to creak under pressure from escalating interest rates,” he said. “So oil prices were already inching down on the general demand malaise” before the IEA “came in and twisted the knife by surprising everyone with their stockpile release.”
Political motives
The IEA announced on June 23 that it will release a total of 60 million barrels of oil in the coming month, with the U.S. tapping its Strategic Petroleum Reserve to contribute half of that. Read more about the IEA decision.
The move was aimed at making up the loss of oil supplies from Libya, which removed 132 million barrels from world markets by the end of May, the Paris-based agency said.
The IEA move might just turn out to be an incredibly wise one, “particularly if the world was edging towards a dreaded double dip recession,” said Parry, who sees a 20% probability for a double dip recession.
But Bob van der Valk, a petroleum-industry analyst based in Terry, Mont., referred to the IEA release as “unnecessary” since the price of Brent and West Texas Intermediate crudes had already dropped by around 10% since news of al-Qaeda leader Osama bin Laden’s death broke out in early May. “The fear factor in the oil market was diminished after Osama bin Laden was killed,” he said.
