ALTHOUGH hopes of economic recovery and an upturn in demand drove crude oil prices to over $75 per barrel, a further rise appears doubtful. Serious concerns have emerged over the sustenance of the global economic growth and its impact on oil demand while supply continues to rise steadily and inventories are at a historic high. The International Energy Agency (IEA) expressed this concern in its latest monthly report. “If economic prognoses prove too optimistic, or the winter stays mild, market sentiment could easily weaken once again,” it said. Similar views were also expressed by Opec, which went a step ahead to warn of an impending correction in the crude oil market. “Given the fragile state of the global financial system, economic growth may remain subdued for some time to come. In contrast, commodity markets have rallied since March, factoring in strong economic growth ahead.”
Through much of October, positive economic data boosted oil prices. The technical end of the US recession pushed oil prices above $80. However, much of the recovery apparently was driven by special stimulus measures such as the cash-for-clunkers car purchasing programme, and a temporary homebuyer tax credit.
According to the IEA, the global oil demand stood at 85.1 million barrels per day (mbpd) in September 2009 quarter — 0.8 mbpd lower than the year ago period — but 1.7 mbpd higher since estimated six months back. Much of this growth has been contributed by the non-OECD countries, mainly China (0.96 mbpd). Just like in the US, the Chinese oil demand growth too shows a strong linkage to stimulus-induced infrastructure spending. With the country raising consumer fuel prices starting November, the demand may not be as strong as seen so far.
Indeed, global diesel demand – which powers the railways and trucks that support the global industrial activity and trade – remains subdued and is expected to register a 3.1% y-o-y decline in 2009, with the OECD featuring a particularly severe contraction (-5.7%).
The historically high petroleum inventories too could pressurise the commodity’s pricing. Oil inventories, as at end September 2009 in OECD countries, are at a historically high level of 4.34 billion barrels. The capacity addition and growth in crude oil supply is likely to keep prices low. The situation in the oil market may continue to look balanced for now. However, as we move towards the traditionally lower demand season in the second quarter of 2010, a weak oil demand will raise the risk of disturbing the already fragile fundamentals.
Through much of October, positive economic data boosted oil prices. The technical end of the US recession pushed oil prices above $80. However, much of the recovery apparently was driven by special stimulus measures such as the cash-for-clunkers car purchasing programme, and a temporary homebuyer tax credit.
According to the IEA, the global oil demand stood at 85.1 million barrels per day (mbpd) in September 2009 quarter — 0.8 mbpd lower than the year ago period — but 1.7 mbpd higher since estimated six months back. Much of this growth has been contributed by the non-OECD countries, mainly China (0.96 mbpd). Just like in the US, the Chinese oil demand growth too shows a strong linkage to stimulus-induced infrastructure spending. With the country raising consumer fuel prices starting November, the demand may not be as strong as seen so far.
Indeed, global diesel demand – which powers the railways and trucks that support the global industrial activity and trade – remains subdued and is expected to register a 3.1% y-o-y decline in 2009, with the OECD featuring a particularly severe contraction (-5.7%).
The historically high petroleum inventories too could pressurise the commodity’s pricing. Oil inventories, as at end September 2009 in OECD countries, are at a historically high level of 4.34 billion barrels. The capacity addition and growth in crude oil supply is likely to keep prices low. The situation in the oil market may continue to look balanced for now. However, as we move towards the traditionally lower demand season in the second quarter of 2010, a weak oil demand will raise the risk of disturbing the already fragile fundamentals.
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