What an intriguing, baffling and captivating crude week it has been! Hit by four-minute madness on Monday, as the day was about to end, a jittery market sent crude slipping by almost $4 a barrel in four minutes, mystifying traders on edge over the prospect of a release from the US strategic reserves and exacerbating a broad decline in commodities. And the oil markets continued to misbehave the entire week. After having climbed to the highest level in more than four months on September 14 to be exact, after the US Federal Reserve announced plan to buy mortgage securities, bolstering economic optimism and on prospect that protests across the Islamic world on an obscure film on Prophet Muhammad (Peace Be Upon Him) may ultimately lead to supply disruptions. Pundits remain perplexed and indeed divided on the real cause of the slippage last Monday. Commentators have been suggesting various possible triggers for the abrupt slide: an input error by a trader (fat-finger trade); liquidation by a hedge fund; falling prices triggering stop-loss orders placed at $115; heavy turnover by computer-driven trading programs; the growing bearish tone of the global economy or some complex interaction among all these factors, yet no one seems certain. The plunge was reminiscent of previous flash crashes in the oil market (May 2011) and equities (May 2010) when prices dropped abruptly without any apparent fundamental cause. On May 5, 2011 Brent oil futures went down as much as $13 a barrel. Though the May 2011 and last week's slump appear unrelated, yet in hindsight, the two had a factor in common: both erupted at a time of intensifying debate over releasing emergency oil stockpiles. Whatever the precise trigger, the sudden plunge in prices on Monday is a timely reminder that liquidity is discontinuous, even in a market as deep and heavily traded as crude oil. Markets can switch from quiet calm to a raging storm with frightening speed for any reason, or no rational reason at all. And crude markets continued to be bearish over the last few days of the week too, trading at near a six-week low after US stockpiles climbed the most since March, Chinese manufacturing shrank and Japanese exports fell, signaling fuel demand may be slowing among the world's biggest crude users. Indeed the US crude inventories surged the most since March as production and imports rebounded from Hurricane Isaac. The US Energy Department said supplies rose 8.53 million barrels last week, more than eight times than what was projected in a Bloomberg survey. Imports arrived at the highest rate since January and output increased. And in the meantime, the fundamentals are simply not supporting the markets. There was definitely some, initial euphoria about the US Fed move, making additional purchases of debt in a third round of so-called quantitative easing. The move followed a European Central Bank bond-buying announcement on September 6. “The economic picture isn't healthy enough to support prices near triple digits,” underlined Chip Hodge, the senior managing director at Manulife Asset Management in Boston. “Prices were getting uplift over the last couple weeks from the EU and US quantitative easing, the anti-Islamic film and maintenance in the North Sea. These three factors are no longer enough to prop up the market,” Mike Wittner, head of oil market research at Societe Generale SA in New York too believes. Markets now appear giving more credence to an emerging bear case for oil, which rests on an increase in Chinese-Japanese tensions, doubts about Spain's well-being and anxiety about continued global economic weakness. And one of the most apparent underlying factors behind crude market slump has been the speculation that Saudi Arabia is moving in to rein in the crude Bull. Saudi Arabia is pumping about 10 million barrels a day of crude and will produce more if customers demand, a Gulf official was quoted as saying in western press. The comments were enough to cool the markets – rather significantly. Riyadh has reportedly offered customers in the US, Europe and Asia, extra oil supplies to offset rising prices, the Financial Times reported, citing the senior Gulf-based oil official. “The current oil price is too high,” and that Saudi Arabia is taking action to keep prices in check. “We would like to see the price coming down and we are working to bring it down,” said the Gulf source. The Gulf based oil official told the Financial Times that the oil price, which rose to a four-month high of $117.95 last week, was “too high” and that the Kingdom “would like to see oil prices back to $100 a barrel”. OPEC delegates too are underlining that Riyadh was trying to bring prices down. “The Saudis are actively managing the market,” added another senior oil official from an African OPEC nation. Despite the concerns, in recent days too, from the likes of Heidy Rehman of Citigroup Inc., of the capacity of Riyadh to continue fuelling the world over the years, the fact remains that Saudi Arabia continues to be the global gas station. It is Riyadh only which has the capacity to swing the markets from one extreme situation to moderation. If anyone still retains some ability to control volatility in the markets, it is none else but Saudi Arabia. And Riyadh not only has the capacity, it has the will to do so too. Recent events have once again proven it. With Saudis ‘actively managing the markets,' crude prices were bound to cool down. And so it did. Whether one likes it or not, the fact is, Saudi Arabia today is the only surviving, mover and shaker of the energy world.
