Oil prices briefly fell under $60 a barrel on Thursday after nearly two weeks of uninterrupted declines, as traders and investors acknowledged that a global economic recovery would take longer than hoped.
But at the end of a volatile trading session, crude oil futures pared their losses, and closed at $60.41 a barrel, up 27 cents, after falling as low as $59.25 a barrel in New York. The price of oil had fallen by about $10 a barrel in the last six trading days, or nearly 17 percent.
Oil rose to $72.68 a barrel in June, its highest trading close this year on optimism about a fast recovery.
Thursday’s session follows the release of a weekly report from the Department of Energy showing a substantial increase in gasoline inventories in the United States, with total oil inventories reaching their highest level since 1990. The report, widely viewed as bearish for oil markets, also signaled weaker-than-expected consumption.
“The bottom line is that it’s all about demand and the lesson here is that the recovery is going to be a long and bumpy road, and not a smooth and straight line,” said Michael Wittner, the global head of oil research at Société Générale, in London. He expects prices could fall as low as $50 a barrel in the short term.
Oil prices have shown unprecedented volatility in recent years, as energy markets attracted investors, like hedge funds and pension funds, that viewed commodities as attractive investments.
Strong demand for oil, coupled with weak growth in supplies over the last decade, propelled oil to a record of $145.29 a barrel last year. The price bubble burst when the global economy plunged into a recession and industrial activity worldwide slowed sharply last year. That shaved the global demand for oil, and pushed down prices to a low of $33 a barrel in December.
But in a sign of exceptional volatility in the energy markets, oil prices have rebounded this year, more than doubling since their year-end lows as many investors bet on a quick recovery. Commodities are also seen as an attractive way to hedge against a weakening dollar and potentially higher inflation.
The outlook for a recovery however remains murky at best. This week, the International Monetary Fund said the global economy would shrink 1.4 percent this year, a bigger decline than its April forecast of 1 quick cash advance.3 percent. But at the same time, the monetary fund also expects stronger growth than it had initially forecast for 2010.
“The market basically overshot because it was overly optimistic about the economy,” said Antoine Halff, the head of commodities research at Newedge, a brokerage firm. “Expectations are being scaled down.”
Still, even as demand remains weak, many analysts do not expect prices to fall substantially.
One reason is the strong discipline shown by producers within the Organization of the Petroleum Exporting Countries. OPEC, which has set a target price of around $75 a barrel, has managed to reduce production in recent months to match the drop in demand.
The secretary general of OPEC, Abdullah al-Badri, told reporters on Wednesday that oil prices were at a “comfortable” level, though still lower than the target set by the group last May.
“The striking drop off in crude prices over the last two weeks is a stark reminder of the hard reality of current global economic conditions: While the pace of contraction has slowed, stabilization should not be mistaken for recovery,” PFC Energy said in a report this week.
The report also pointed out that OPEC’s discipline — the ability of the members of the oil cartel to stick with their commitments to reduce production — was slipping. From a high of 80 percent compliance in April, the consulting firm estimated the current quota discipline at around 75 percent, which is still pretty high according to historical standards.
The volatility in commodity markets prompted the Commodity Futures Trading Commission, the top federal regulator, to say this week that it was considering clamping down on excessive speculation in energy markets. The move would be politically popular, but some energy experts warn it could backfire by making energy markets less liquid, and therefore more volatile.
“Trading limits is potentially a big one,” Mr. Wittner said. “One of the danger of position limits, is that if you reduce volumes, you can actually increase volatility.”