Observe...(what's this used for again?)

The skill Observe has been a mystery for me since I got it on Culinarian. Any idea what this skill is supposed to do?

You get to basically skip a "poor" status, in case you missed "excellent" and don't want to use a touch on "poor"

There are a handful of cases where it's useful to use it to fish for a "good" or "excellent" as well, though those are vanishingly rare. A couple of times I've been holding a Innovation(2) x Great Strides(3) with a spare 14CP and just enough durability to hit Byregot's Blessing and then finish the craft, and in that case I'll fish for a "good" for my Byregot's. However, you almost never actually get a good when you're looking for one, and higher level crafting usually is planned enough that you're not going to have 14CP just sitting there. Even if you do, you probably don't have the leeway in ability steps to use an Observe. It's very situational.

Sometimes I'm sitting at like, 90 CP and have 5 durability left on the item and am at 80% quality so I hit observe and cross my fingers for a good so I can tricks of the trade up high enough to master's mend.

Or I have great strides up with two left, am on a normal and Observe won't force me to downgrade my touch.

While I'm not a fan of observe as Innovation costs only 4cp more for "somewhat" the same effect but better.
It's good if you have Steady hand + Great Strides + Innovation up and you want to "gamble" for a good/excellent status.

For me it's rather situational, I'd rather refresh a buff lil bit earlier than hitting observe

Also - if you sometimes "stupidly" manage in hurry to get in situation where you have MM / MM II up with dura at 10 and can't / do not want do any non touch / non progress actions and need to get dura back up to at least 20 to be able to proceed with touch or progress action in next step (happened to me a few times and saved my ass there). While it's definitely not one of the most used actions it has it's place on my (second) craftin cross-bar ;)

I agree with the above. I've used Observe successfully in all four cases:
- Need a Manipulate or Master's Mend badly, but are 6 or less CP short, Observe and hope for a Good status for Tricks of the Trade.
- Have used Great Strides and Innovation and am ready for my grand slam Touch, Observe and hope for a Good status so the slam will be that much slammier.
- An Excellent status has just passed, and I don't want to waste a Touch on a Poor status. Observe, and the bad status passes harmlessly. (Usually I'd just do a Synthesis step here, but if doing so would finish the synth prematurely, Observe will help.)
- I used Manipulate at 10%, and need to wait a step before I can Touch or Synthesize. Observe gives the Durability time to regenerate to the point where it's safe to Touch or Synthesize.