USD 89.7026

0

EUR 97.0954

0

Brent 81.84

-0.25

Natural gas 2.773

+0.27

889

Despite economic recovery Brent crude prices should stay unstable

So far in 2010, front-month Brent crude oil prices have traded in a $10 per barrel range, from just above $70 per barrel to just above $80 per barrel.

Despite economic recovery Brent crude prices should stay unstable

 

So far in 2010, front-month Brent crude oil prices have traded in a $10 per barrel range, from just above $70 per barrel to just above $80 per barrel. More recently, however, the price has hovered just above the lower end of the range, and with demand showing no signs of increasing there is a good case for forecasting that the next significant move could be down rather than up.

For a long time, it has been fashionable to suggest that the oil price is essentially «tomorrow's price today». What this means is that although 'today's' oil market fundamentals look terrible (weak demand and high stocks), 'tomorrow' will be better (recovering demand, falling stocks and continued production restraint by members of the Organisation of Petroleum Exporting Countries). This justifies a strong price, which most observers believe will move higher, albeit gradually.

 

Since the start of 2010, however, sentiment has changed. This is because oil demand has remained stubbornly weak in the OECD countries and has not been as strong as expected in developing countries. Data for US oil demand (more than 20% of the world total) show that, amazingly, January's trend is still running below year-ago levels. US stocks of crude oil and the main petroleum products remain at historically high levels.

 

Always lurking in the background is concern about the pace of global economic recovery, with worries about several eurozone economies (e.g. Greece, Ireland, the UK, Spain and Portugal) and indications that the Chinese authorities are actively slowing growth in response to fears of inflation. Stock markets have reflected this unease, with the Dow Jones Index falling 5% from its 2010 opening level by the end of January, although it has recovered slightly since. For crude oil, the front-month Brent price closed on January 29 at $71.46 per barrel, the lowest value since mid-October 2009, although, again, it has recovered slightly since.

 

Even good news has done little to improve the mood. First, the US economy grew 5.7% in Q4 2009 compared to Q3 2009, the best quarter-on-quarter performance for six years. Second, the International Monetary Fund revised upwards its forecast for world economic growth in 2010 from 3.25% to 4%. Taken together, these numbers are positive, but so far reaction has been muted. Essentially, investors are very aware that the risks have not gone away. Fans of the Baltic Dry Index, which is the global benchmark of freight costs for dry bulk commodities and a helpful, albeit rough and ready, proxy for trends in world trade, have seen its value plummet in recent weeks.

 

In this climate, even the most enthusiastic oil price boosters are having trouble staying positive. As far as fuel buying is concerned, the peak winter season is already over and northern hemisphere refiners are going to demand even less crude oil than before. Utilization rates for US oil refineries are at historically low levels, with refining margins on the floor. It is difficult to see much upside for oil without signs of life from oil demand and an indication that high stocks are falling. It looks like the low-$70s to low-$80s range for oil prices is here to stay for the foreseeable future. 


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