One month is a long time in today’s oil industry. My last column, four weeks ago, was written against the background chatter of $100/barrel oil and deepening concern that the government’s refusal to allow their marketing companies to recover the costs of imported crude would push these Navratnas to the financial edge. This article is being written against a different backdrop. Prices have slid from around $75/b to $60/b. The chatter is not whether $100 will be breached but whether prices will come down to $50. It is not whether companies should be handed another bailout but whether prices at the retail outlet should be reduced.

The oil company executives have also dropped their hangdog expression. Last week the IOC chairman estimated that his company had saved Rs 600 crores during the month and that ‘underrecoveries’ had reduced from Rs 100 crs a day to Rs 50 crores. And Reliance, which had effectively closed its pumps, was reportedly contemplating the resumption of sales. All this in a month.

What has brought about this dramatic shift? Why have prices suddenly reversed direction? Certainly demand has not slowed down. And there has been no material spurt in supplies. The physical fundamentals have not altered. The answer lies not in Economics 101 but in the ephemeral term ‘perception’. What has changed is the perception of the clever, young, computer bound and quantitatively inclined hedge fund trader.

A month back he saw a world riven by resource nationalism; threatened by turmoil in the Middle East and under risk from Atlantic hurricanes. And a tight oil market in jeopardy of volatile and unexpected disruption. He (and his ilk) bet $150 billion of their investor’s capital on the perception that prices would not only remain high but rise further. A month later his world view has shifted. He is now more optimistic. The Lebanon ceasefire is holding; the ‘godowns’ of the oil companies are flush with stocks to take care of any exigency other than the deepest of winters, and the anti-American rhetoric of the Presidents of Venezuela and Iran has not (at least yet) provoked anything but a verbal retort from Bush. The bears have replaced the bulls and the ‘hot money’ in oil funds is now flowing elsewhere. The decline in prices reflects this shift in perception.

... contd.