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Crude unlikely to slip soon

Sam Fletcher
OGJ Senior Writer

Crude prices broke through the psychological $80/bbl barrier in April and show little sign of slipping back, “despite the Organization of Petroleum Exporting Countries’ usual (but misplaced) concerns about second-quarter weakness,” said analysts at the Centre for Global Energy Studies, London.

“Oil prices are now almost $10/bbl above their first-quarter average and OPEC’s repeated warnings of second-quarter weakness look unconvincing,” CGES said Apr. 23.

The market’s recovery is “remarkably uneven thus far,” with demand “sluggish” among some countries of the Organization for Economic Cooperation and Development and “far worse” in others,” said analysts at Barclays Capital Commodities Research. “In Europe, conditions have weakened further this year, and regional oil demand has been falling faster than at any other point during the current cycle,” they said.

In its April update to the World Economic Outlook, the International Monetary Fund said the global economic recovery is “proceeding better than expected” but unevenly. Among the advanced economies, the US is off to a better start than Europe and Japan, while “emerging Asia” is leading the recovery among emerging and developing economies, with many emerging European and former Soviet Union economies lagging behind.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, “The recovery is tepid in many advanced economies but proceeding solidly in most emerging and developing economies, especially in Asia. World growth now is expected by the IMF to be 4.2% in 2010 and 4.3% in 2011.”

Deutsche Bank’s outlook for global growth “strengthened a bit over the last few months,” Sieminski said, “but we still see growth moderating somewhat next year as fiscal stimulus turns to fiscal drag, as monetary stimulus begins to wane, and the credit impulse loses some of its momentum. For 2010, we forecast global GDP growth at 4.3%. This is expected to ease to 4% next year. The global economics team sees growth in industrial countries over the next 2 years averaging around 2.5%, a good deal more subdued than the 6% rate of expansion projected for emerging market countries as a group.”

If commodity prices were determined solely by OECD dynamics, they likely would have been “bouncing along the bottom” for an extended period, said Barclays Capital analysts. “With general sentiment being further undermined by concerns about European debt and the occasional outbreak of volcanism, the overall market picture might look pretty grim,” Barclays Capital said.

Commodity price outlook
However, they said, “What has prevented the whole picture fading to grey has been the decoupling of demand patterns in the emerging consumers from those in the mature energy consuming economies. Not all of that is due to China, but China is the largest component and also the most totemic. In the first quarter, Chinese oil demand grew year-over-year by 1.25 million b/d, which is a growth rate of 17%. Demand from Asia as a whole plus the Middle East grew year-over-year by about 2.4 million b/d—the equivalent in oil demand terms of creating another Germany.”

Barclays Capital analysts said, “The surge in Asian and Middle Eastern demand has spared the market an extended period crawling along in the mire, enveloped by nothing but the utter stodgy grayness of it all. In other words, emerging markets have saved commodities from having to relive the 1980s.” They said, “The shift in the location of the barrel of marginal oil demand and the sheer number of those marginal barrels are changing the economics and politics of the market.” As a result, the analyst said, “Some key geopolitical relations have moved into a period of redefinition and flux” that is central to price dynamics this year and “define the long run.”

The analysts noted, “We are a long way into the year, yet no clear consensus view on fundamentals has emerged. The weaker spots of the market are those in which data flow is fastest and most microscopic, while the runaway strength is in areas in which the data flow is slower and less encyclopedic. In the weak but transparent areas, crude has to be discounted to find an immediate market; in the dislocated but price-setting microsystems, it has to be discounted heavily; while in the strong but opaque areas, there is a far stronger bid.”

The current quarter will involve “some resolution of those paradoxes and balance between local weaknesses and global strength,” said Barclays Capital analysts. For the 15th consecutive month, they maintain their average price forecast for West Texas Intermediate at $85/bbl for 2010 and expect global issues to raise prices “over the balance of the year.”

(Online Apr. 26, 2010; author’s e-mail: samf@ogjonline.com)


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