Market non-madness

Oil's eerie calm cannot continue

The price of oil has been doing something really extraordinary. It has hardly moved for several years. That stability probably contains the seeds of its own destruction.

A barrel of Brent goes for $110. At five per cent above the low of the last year, and five per cent below the high, this is the narrowest 12-month trading range for oil since at least 1988. The recent experience is not a fluke. Oil has been remarkably steady since early 2011. The lower volatility is tough for speculators. For users, it is more mixed. They would prefer a lower price, of course, but like the predictability.

The dullness in the largest commodity market is hard to explain. It is not part of a general trend for major commodities; there have been sharp falls in iron ore and copper. Variations in oil demand and supply have been neither particularly small nor predictable. Professional traders, who are sometimes accused of amplifying price moves, have been less active, but their retreat looks more like an effect than a cause of price stability. It looks like some powerful players are responding quickly and accurately to changes in supply, demand and inventories.

Oil's great moderation could last for years. Production and demand are both increasing at steady and slow paces. If the market's managers - primarily the OPEC cartel - want to keep the price constant, they should not have much trouble, at least as long as troubled politics keep production down in such major producers as Iran, Iraq, Nigeria and Russia.

Still, even allowing for geopolitical trouble, the price is high relative to the cost of new production in many parts of the world. The more solid the prognosis of $100-$110 a barrel oil, the greater the temptation to increase production. The chances of an eventual supply breakout are high.

And when the market breaks, the correction could be big and unruly. As the financial markets have often shown, a long period of stability at an unreasonable level is often followed by the most painful sort of volatility.