Latest Data Lend Support to Market Bulls as Crude Passes $70/Barrel

Global crude oil prices continued to advance last week, marching past the psychologically significant $70/barrel level, a more than doubling in value in just four months. Benchmark crude oil prices WTI and Brent peaked last Thursday at $72.68/b and $71.79/b, respectively, before coming off slightly on Friday and Monday.

Debate continues over the sustainability of the rally, which has come despite persistently weak market fundamentals. Adding to the confusion was news last week that the World Bank drastically raised its estimate of the global economic contraction this year from 1.7% to 3% while the International Energy Agency (IEA) simultaneously lowered its estimate for the rate at which world oil demand would shrink this year, revising the estimated contraction from 3.1% to a slightly less drastic 2.9%. Nonetheless, overall, the optimists in the market appear to be winning the argument, as the latest economic data show signs that the global economic downturn may be starting to ease.

IEA sees global oil demand shrinking less than earlier expected

The biggest news for market optimists last week was an announcement by the IEA that it has raised its 2009 world oil demand estimate for the first time in 10 months, although the agency cautioned that the move does not necessarily point to the start of a global economic recovery. The IEA adjusted its 2009 demand forecast up by 120,000 b/d as a result of stronger-than-expected demand data mainly from the US and China during the first quarter of the year. Global oil demand this year is now projected at 83.3 million b/d, down 2.9% from 2008. This compares with an early estimated contraction of 3.1%.

The revisions resulted mostly from higher-than-anticipated demand for LPG and naphtha on the back of a rebound in petrochemical activity in OECD countries. The IEA cautioned, however, that the upswing in petrochemical activity, which had reached historical lows in early 2009, is possibly due to industry restocking rather than fresh demand. By contrast, demand for transportation fuels remains "very weak," suggesting that other economic sectors are still constrained. "These adjustments do not necessarily reflect the beginning of a global economic recovery, signaling at best what could be the bottoming out of the recession, possibly related to industrial inventory rebuilds."

In the US, the world's biggest oil consumer, the IEA said demand for transportation fuels remains "significantly subdued" with jet fuel/kerosene demand at 12.9% below last year's levels, while diesel demand is down by 15.8% year on year. It said US gasoline demand is still contracting (down 0.6% year on year), albeit less sharply than in previous months.

For non-OECD oil demand, the IEA said it left its estimates essentially unchanged for both 2008 and 2009 despite stronger-than-expected demand from China. According to preliminary data, China's apparent oil demand surged by 6.5% year-on-year in April, mostly on the back of strong deliveries of LPG, naphtha and gasoline.

On the supply side, the IEA raised its forecast for non-OPEC oil supply and production of natural gas liquids by OPEC countries this year. The IEA now expects non-OPEC production to average 50.5 million b/d in 2009, 200,000 b/d more than previously predicted. The revised outlook for non-OPEC supply was due to higher-than-expected growth from new Russian fields, "more robust" production from declining North Sea fields and stronger crude output in Colombia. The IEA now estimates the average "call" on OPEC, or the amount of production required by the market, for 2009 at 27.7 million b/d, 200,000 b/d less than it predicted in its previous report. OPEC produced 28.38 million b/d of crude oil in May, according to the latest statistics.

On stocks, the IEA said industry-held oil inventories in OECD countries rose by a total of 10.4 million barrels in April and remain at "abnormally high" levels. Preliminary data also points to a bigger stock build of 30.5 million barrels in May.

More positive signs from gathering of G20 finance ministers

The market also received some positive signs from a meeting of finance ministers from the world's major economies over the past weekend. The G20 group of finance ministers vowed Saturday to take "whatever action is necessary" to turn around the world economic slowdown and plan meet again next month to hammer out details. "We're prepared to take whatever action is necessary to ensure growth is restored," said British finance minister Alistair Darling, who hosted the talks.

The ministers agreed to tougher regulation of the financial system but they failed to reach a consensus on a new stimulus package despite controversial calls from the US for coordinated international pump-priming. Other measures agreed included regulatory oversight of all credit agencies, blamed for being too slow to alert investors to high-risk instruments, as well as a need for "sufficient supervision and regulation of hedge funds." The G20 also stated its key priority was restoring bank lending to help ease the crisis.

Meanwhile, US Treasury Secretary Timothy Geithner said at the meeting that there were encouraging signs the rate of decline in global economic growth had slowed but the global economy was still operating "well below potential" and faced acute challenges. "We meet at a time of transition in the global economy. The force of the economic storm is receding. There are encouraging signs of stabilization across many economies," Geithner said. "The rate of decline in GDP growth in the major economies has slowed, and growth is accelerating in some emerging economies like China.

Global trade is starting to show signs of life." He said financial markets now reflected greater confidence in the stability of the banking systems.

"We need to reinforce the improvement in global demand and continue to lay a foundation for a durable recovery. It is too early to shift toward policy restraint," he added. The next step will involve financial reforms in the US and proposals to tighten oversight of international financial institutions, Geithner said. "We are making steady progress on financial reform. Next week, we will outline comprehensive proposals for regulatory reform in the US. Because risk does not respect borders, we will put forward several international proposals in our reform package that will help to raise standards globally," Geithner said. "We aim to put in place more conservative standards for financial oversight of internationally active financial institutions and global markets such as derivatives," he said. Presumably, this would include energy derivatives.

OPEC also chimes in with an optimistic note

For their part, OPEC producers said last week that they believe the worst of the global economic downturn is over, even as OPEC revised down its estimate of global oil demand and admitted that its members had increased crude production for two months in a row. "In light of the considerable challenges the world economy and commodity markets, particularly the oil market, have undergone, the worst appears to be behind us," OPEC said in its latest monthly report. "[If] this more optimistic sentiment holds, ongoing efforts to reduce the excess supply is the key factor in supporting market stability and should help to gradually bring commercial inventories back to more healthy seasonal levels by the end of the year," it said.

OPEC also said that the oil market appeared "to have entered a new environment," noting that most institutions had started the year with expectations that deteriorating fundamentals would push prices downward but that, thanks in part to developments on financial and equity markets, prices had not only remained steady but had even climbed.

"Crude oil prices have shown a strong correlation with developments in the equity markets as well as fluctuations in the US dollar. The rise in equities generally reflects an improving sentiment about the outlook for the world economy and hence oil demand growth. As a result, crude futures and equities have risen in tandem, on the general perception in the market that the worst is over for the world economy," it said.

Nevertheless, while noting that the current contango structure of the market had provided an incentive to build inventories both onshore and in floating storage, which had helped to push OECD commercial crude stocks toward levels last seen in 1998, OPEC said inventories appeared to have peaked.

OPEC said a key uncertainty facing the oil market was whether the current more optimistic sentiment could be maintained and that this would depend largely on improvements in the real economy and in financial markets. The world economy still faces considerable challenges, it said, noting that OECD unemployment was still rising, bank balance sheets remained "shaky," and private consumption, investment and exports were expected to remain subdued.

Fragile economic recovery could be stymied by spike in oil prices: IEA chief

Despite the growing talk of better times ahead, IEA's Executive Director Nobuo Tanaka told Platts June 8 that the recent spike in crude oil prices might drag down global economic recovery. "The way we see the current level of inventories, the current level of demand, we don't have enough evidence of demand growing as such, so we are a bit concerned with the speed of the price hike," Tanaka said in an interview on the sidelines of the 14th Asia Oil and Gas Conference in Kuala Lumpur.

In his speech to the AOGC delegates, Tanaka said the "green shoots" of economic recovery were not evident in early data for 2009, but prices had strengthened on the back of OPEC production cuts, a weakening US dollar, and "more optimistic equity markets." A "very rapid increase in the price [of oil] may have a negative impact on the global economic recovery," Tanaka told Platts.

Moreover, the next oil price spike may already be in the making, according to the chief executive of Royal Dutch Shell, Jeroen van der Veer, who also attended the event. Oil and gas players are slashing spending on new projects amid the current recession, but as energy demand climbs over the long term, "the next [oil] price spike may already be in the making," he said. Citing the IEA's estimate of a 20% drop in oil and gas project investment this year compared with 2008 and a 40% slump in renewable energy sector investment, van der Veer said the current overcapacity in the market would disappear as in the long term, energy demand was bound to climb.

As the world's population increases from 6 billion to 9 billion by 2050, "energy demand, even taking into account energy saving, will double," he said. Oil and gas would not be able to supply the incremental demand, van der Veer said. "You need renewables, unconventionals and conventionals." The Shell executive reminded delegates that construction of oil and gas projects takes "at least four to five years" after the final investment decision. "The system is very slow to react," he said. While Shell itself plans to maintain investments "at a relatively high level" in 2009, the same might not be true for the whole sector, he said.


Our Privacy Pledge

Most Popular Articles

From the Career Center
Jobs that may interest you
Logistics Coordinator & Optimization Analyst
Expertise: Logistics Management
Location: Billings, MT
Technical Sales- Decontamination/Chemical Cleaning Services
Expertise: Sales
Location: Baton Rouge, LA
Account Manager - Western US - Vapor Control & Degassing
Expertise: Sales
Location: Long Beach, CA
search for more jobs

Brent Crude Oil : $51.78/BBL 0.77%
Light Crude Oil : $50.85/BBL 0.83%
Natural Gas : $2.99/MMBtu 4.77%
Updated in last 24 hours