Market fundamentals dampen optimism

Hope for economic recovery raised the front-month contract of benchmark US crudes briefly above $60/bbl for the first time this year on NYMEX before it fell back to $56.34/bbl in the week ended May 15.

May 18th, 2009

Sam Fletcher
OGJ Senior Writer

Hope for economic recovery raised the front-month contract of benchmark US crudes briefly above $60/bbl for the first time this year on the New York Mercantile Exchange before it fell back to $56.34/bbl in the week ended May 15.

Although the worst may be over, said analysts at the Centre for Global Energy Studies (CGES), London, "The global economy is likely to scrape along the bottom for a while." They reported, "Investors' appetite for more risk seems to have made a muted comeback and more cash is flowing into equity markets and the commodities sector, while the current weakness of the US dollar has also played a part…. It is unlikely that oil will fall to $50/bbl again, but the optimism that has characterized the oil market since the end of March may well ebb."

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, "However hard commentators try to talk up the economy, we cannot escape the fact that oil demand is showing no signs of improving." They noted "the harbingers of doom at the International Energy Agency" expect a 2.6 million b/d drop in world oil demand in 2009, which would be "larger even than the 2.5 million b/d fall seen in 1980."

For the ninth consecutive month, IEA in Paris reduced its previous forecast of oil demand, down 230,000 b/d in its latest adjustment to a total 83.2 million b/d, 3% below 2008 demand. "Continued oil demand weakness is premised on strong economic recovery later this year remaining elusive," EIA said. Only a day earlier, the Organization of Petroleum Exporting Countries reduced its 2009 demand growth forecast by 200,000 b/d to 1.6 million b/d to 84 million bbl.

KBC analysts said, "What is even more disturbing than the IEA's headline total is the fact that demand is down almost everywhere, with only India and Saudi Arabia of the world's top 10 oil markets showing any growth at all." They acknowledged "a small glimmer of hope" when rude inventories fell in the week ended May 8, the first decline in 10 weeks. "But this is straw-clutching," said KBC analysts. "Four-week average gasoline demand was down 1.2% on last year, and we might be optimistic in expecting much of a gasoline season this year."

'Sustainable' prices
CGES analysts said oil prices are "more or less" sustainable around $50-55/bbl under current conditions. They assume the drop in world demand for oil will be "much less drastic" than the IEA's forecast.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "Oil analysts should stay focused on the potential for lower equity markets given the very strong positive correlation recently between oil prices and the Standard & Poor's 500 [an index of the 500 largest US companies]. We estimate that since September every 50-point move in the S&P 500 has been worth a $7/bbl move in the West Texas Intermediate crude price."

Meanwhile, Olivier Jakob at Petromatrix, Zug, Switzerland, noted "a general consensus" that the recent oil rally "was purely a correlation to the equity markets and not linked to oil fundamentals." However, he said, "With industrial demand down more than driving demand and with the combination of a contango in distillates and a backwardation in gasoline, distillates is driving gasoline out of storage capacity, and this is then making the day-of-cover picture in gasoline not very different from previous years. This then makes gasoline still exposed, like in previous years, to supply glitches." Only recently, he said, reports of "a few cracker problems" had "a direct impact" on gasoline prices.

Meanwhile, Jakob maintained "a Nigerian risk premium" on the price of crude due to long-term civil unrest in that oil-producing country. "If nothing happens in Nigeria, we will then transfer it to a Middle East premium," he said in connection with Israel Prime Minister Binyamin Netanyahu's visit to Washington, DC, beginning May 18.

Jakob noted "leaks" earlier this month about the Israeli air force training on refueling missions between Israel and Gibraltar. He reported on May 14 another leak "that Israel has rented MIG-29 fighter jets (the type owned by Iran) to train its pilots in 'dog-fights' against them; and it was leaked…that the US Central Intelligence Agency director was sent to Jerusalem 2 weeks ago to gain reassurances that Israel would not strike Iran without a green light from Washington." Jakob said, "All of this is part of psychological warfare, but we have been there before, and we can't fully ignore it."

(Online May 18, 2009; author's e-mail:

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