Softening economy lowers oil prices

Sept. 6, 2010
Amid indications the economic recovery is slowing, the front-month crude contract price fell for five consecutive sessions to an 11-week low of $71.63/bbl Aug. 24 on the New York Mercantile Exchange.

Amid indications the economic recovery is slowing, the front-month crude contract price fell for five consecutive sessions to an 11-week low of $71.63/bbl Aug. 24 on the New York Mercantile Exchange.

That decline was separated by only a 1-day increase of 53¢ to $75.77/bbl on Aug. 17 from another 5-day downturn that began Aug. 10 with the loss of $1.23 to $80.25/bbl. The near-month contract eventually fell below $75/bbl Aug. 19, down 99¢ to $74.43/bbl, and continued falling to $71.63/bbl Aug. 24. It rebounded to $72.52/bbl Aug. 25 and climbed to $73.36/bbl Aug. 26. Although the front-month crude price closed below $75/bbl for six straight sessions, analysts at the Centre for Global Energy Studies (CGES), London, said, "There is no sign yet that a shift below $70/bbl is in the cards."

West Texas Intermediate and North Sea Brent futures initially slid toward $71/bbl on weak US housing figures and renewed concern about European sovereign debt. However, CGES analysts said, "The main benchmarks subsequently rose. Most likely, a good number of traders thought the [Aug. 24] sell-off was an overreaction, while better-than-expected weekly US jobless claims figures were perhaps also a contributory factor." They expect crude futures prices to trade at $70-80/bbl "for the next few weeks."

CGES analysts observed, "For the past 10 months crude oil prices have remained remarkably stable, with benchmark grades trading in a range between $70 and $80/bbl and showing no sign of breaking decisively in either direction." Oil supplies are abundant, with non-OPEC production up 1 million b/d, "as Mexican output has stabilized and new fields have come on stream in Russia, Brazil, the US, and Africa, boosted by rising output of gas liquids. The Organization of Petroleum Exporting Countries has also seen a surge in its production of gas liquids, which fall outside the quota system, as new LNG trains are commissioned," CGES reported. "OPEC has plenty of spare capacity, but the departure of…US combat troops from Iraq raised concerns about the country's ongoing stability."

Global oil demand rising

Meanwhile, analysts said, "Global oil demand is rising as the world economy recovers from recession, but the pace of the increase is likely to slow in the second half of 2010 and into 2011 from the levels seen in the first half of this year." That's partly because demand for the first half of 2010 was rebounding from comparable lower levels in the first half of 2009.

"But it is also a reflection of the belief that the recovery is beginning to run out of steam, particularly in the developed countries of the Organization for Economic Cooperation and Development, where consumer confidence has not returned, unemployment remains stubbornly high, and governments are beginning to embark on deep spending cuts in the face of huge fiscal deficits," CGES reported. "In developing Asian countries, too, demand growth appears to be easing as the demand for their exports has not taken off as hoped."

Prices of $70-80/bbl "are comfortable for the oil producing countries and also for the oil industry, which is able to pursue the complex new projects that are needed to offset decline in older fields," CGES analysts observed. It's even acceptable to governments of major oil-consuming countries "as high oil prices help them in their pursuit of environmental objectives," they said.

The only group to whom high oil prices are unacceptable is energy consumers, "many of whom are already concerned about their future earnings prospects, are being hit by rising fuel and food prices, and are likely to be squeezed further by the ending of government stimulus packages, leaving them reluctant to increase their discretionary spending," CGES pointed out. "At present, OPEC is in a position to keep oil prices where it would like to see them, but this comes at a cost…that the global economy will recover more slowly and the oil market will not grow as fast as it would have done with more moderate prices."

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