What is The Right Price of Oil?
Oil prices slipped for the third week in a row, with the WTI dipping below the $70 mark as US stockpiles rose by 500,000 barrels over the week, rising consistently since January to reach 363 million barrels. The action, in unison with China’s record stockpiling from January to March, when its average oil imports spurted by over 30 %, caused price inversions to hurt speculators and bring down futures from its 4th May high of $87.
Europe's Oil giants at the Davos meet had predicted a supply challenge for oil, leading to peak oil prices. The scare created by the ICE cartel set off this race in stockpiling, first by China, followed by US to maintain comfortable inventories before peak demand.
When the speculators drove up future prices through April, the big buyers eased off their long term purchases, and bought from the spot markets to damage the contango trade making it unprofitable to hold stocks as the spread between spot and future prices fell to a wafer thin $2 at the NYMEX.
The big question now is, what is the right price of Oil. Fadel Gheit, a Senior analyst at Oppenheimer had opined in March that any price of Oil above $60 is a result of speculation. Mukesh Ambani, of Reliance while addressing fellow refiners at Mumbai last week had asked them to be ready for oil prices between $80 to $100 during the year to come.
The fair price of oil is highly debatable. It will however have to be both sustainable for the producers as well as cost effective for the buyers. The range of $65 to $70 looks the likely price that will balance the interest of both groups as it leaves a healthy profit margin of $15 to $20 billion for big producers like Saudi Arabia and drives gasoline prices to a comfort zone for energy guzzling nations like US and China.
Buyers from Europe, India and South East Asia should now take advantage of the price dip and step up purchases to increase their stockpiles, as current prices are 13% below the 50 day moving averages. Any dip below $65 will make it nonviable for producers, forcing OPEC to cut production and cause another round of volatility.