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Investors regain risk appetite

Sam Fletcher
OGJ Senior Writer

After intraday trading as low as $67.15/bbl earlier in the week, the July contract for benchmark US light, sweet crudes rebounded to $74.55/bbl May 27 on the New York Mercantile Exchange in a 2-day rally that some hoped signaled a return of investors’ risk appetite, although the contract dropped to $73.97/bbl in the next session.

“The rebound indicates that investors thought the initial scaremongering [over Europe’s economy] was overdone, and this sentiment was reinforced by the Organization for Economic Cooperation and Development lifting its forecasts for global gross domestic product,” said analysts at the Centre for Global Energy Studies, London.

Investors will remain focused on Europe’s economic crisis in coming months, particularly on public reaction to proposed national budget cuts, and oil prices likely will reflect that uncertainty, CGES analysts said. “In such an environment, it is unlikely that the main benchmarks will breeze past $80/bbl as they did in April, particularly since there has been no real improvement in the fundamentals of the oil market,” they said.

“The markets are now worried about the sheer volume of debt Spain has to roll over in 2010 and 2011, as well as the country’s 20% unemployment rate and the uncertain reaction to the government’s €15 billion austerity plan. Portugal and Ireland likewise may face difficulties over their debt levels. This means the region’s economic growth and oil demand could come under serious pressure in the second half of the year, especially if there is a widespread collapse in investor confidence,” said CGES analysts.

China committed
China helped boost oil prices by reaffirming its commitment to its European assets, which boosted optimism for an economic recovery. “Heartening as this may be, it does not alter the fact that many governments in the developed world still have to decide how to ensure that the fragile economic recovery continues. On a simplified level, the leaders of these countries have two options,” CGES said. “On the one hand, they could postpone budget cuts and tax rises and pump more money into the economy. The US government seems to be looking closely at this option.”

On the other hand, analysts said, “Governments could cut expenditures now, a route that Spain, Italy, and Greece are following, albeit under duress. The risk with this option, of course, is that if everyone cuts at the same time…it could kill off the recovery.” The simultaneous reduction of government spending would reduce OECD oil demand. “We expect demand to be flat this year compared with 2009, but it could well tip into negative territory if GDP growth is worse than expected, and this would put downward pressure on oil prices,” said CGES analysts.

“Oil could even be part of the solution: a period of lower prices could soothe the inflationary pressures that some governments are confronting. Unfortunately, this is very unlikely,” they said, adding, “When the main global benchmarks dropped below $70/bbl recently, the Organization of Petroleum Exporting Countries’ members were quick to voice their concerns, suggesting that they would act if the price fell to levels they deemed unacceptable. While such a stance might suit their national interests for now, it might well prove to be short-termist if it hampers the global economic recovery.”

Gulf oil
Crude output from the Gulf of Mexico has become an increasingly important component of total US oil production in the last 15 years, and the US Energy Information Administration expects it to furnish almost 30% of US crude this year.

Therefore, US President Barack Obama’s decision to extend the moratorium on new deepwater permits through the end of the year will hurt both the industry and the administration’s goal of reducing US crude imports. Moreover, Interior Secretary Ken Salazar unexpectedly ordered 33 deepwater exploratory rigs in the Gulf of Mexico to cease drilling “at the first safe stopping point” deemed possible pending investigation of the deepwater Macondo blowout.

This could reduce US oil production by 160,000 b/d in 2011, said Adam Sieminski, chief energy economist, Deutsche Bank.

Meanwhile, the National Oceanic and Atmospheric Administration forecasts an “active to extremely active” hurricane season in the gulf this year with a 70% chance of 14-23 named storms, of which 8-12 would reach hurricane status, including 3-7 of Category 3 strength or higher. chief meteorologist and hurricane forecaster Joe Bastardi earlier said this could be a “top 10 year” for storm frequency and strength. He predicts 16-18 named storms, with 6-10 hitting the US coastline. He expects 5 storms to be Category 3 or higher.

(Online June 1, 2010; author’s e-mail:

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