THE recent reversal in the month-long steady uptrend in the global oil prices underlines the fundamental weakness that engulfs the industry. Oil prices, which gained nearly 15% from end-May to cross $78 per barrel by June end, have retreated to $71-72 levels in the first week of July. Today, the medium-term market trend appears to hinge on two main factors — the threat to global economic recovery from OECD sovereign debt issues and the sustainability of Chinese oil demand growth. As the Organisation of Petroleum Exporting Countries (Opec) had mentioned a couple of months ago, oil prices continue to depend on the estimates on global economic recovery, while an oversupply situation continues. Therefore, it is not that various global agencies are regularly giving warnings about downside risks to oil prices. The International Energy Agency (IEA) — the industry watchdog for industrialised nations (OECD) — upped its demand forecast for 2010 in its latest monthly report to 84.6 million barrels per day (mbpd), nearly 2% above last year’s. However, it clearly warned of downside risks, saying, “the high level of data could subsequently be revised down.”
Piling up inventories is another problem as the agency noted a sharp 48 million barrel jump in OECD’s petroleum inventories to 2.7 billion barrels, which was substantially higher than the five-year average.
With the supply comfortably overtaking global demand, a quick respite may not be in sight. The level at which Opec needs to produce to maintain the global demand-supply balance is lower at 28.7 mbpd against its current production above 29 mbpd.
“However, Opec output looks set to increase over the next two months, based on announced customer allocations for June and July,” mentioned IEA.
Since last October, crude oil prices have moved within a relatively stable range and was kept in balance by competing upward and downward forces. However, the recent drop in prices to low $70s appears to reflect a shift in sentiment about the world economic recovery. Other factors tempering higher price moves, include stubbornly high global oil stocks, with inventories holding at the higher end of the five-year range, and a relatively comfortable level of Opec spare capacity. Although demand has seen some improvement recently, this has been more than overwhelmed by the higher growth in supply. Additionally, in the light of ongoing risks, there is considerable uncertainty on the outlook for the second half of the year.
Piling up inventories is another problem as the agency noted a sharp 48 million barrel jump in OECD’s petroleum inventories to 2.7 billion barrels, which was substantially higher than the five-year average.
With the supply comfortably overtaking global demand, a quick respite may not be in sight. The level at which Opec needs to produce to maintain the global demand-supply balance is lower at 28.7 mbpd against its current production above 29 mbpd.
“However, Opec output looks set to increase over the next two months, based on announced customer allocations for June and July,” mentioned IEA.
Since last October, crude oil prices have moved within a relatively stable range and was kept in balance by competing upward and downward forces. However, the recent drop in prices to low $70s appears to reflect a shift in sentiment about the world economic recovery. Other factors tempering higher price moves, include stubbornly high global oil stocks, with inventories holding at the higher end of the five-year range, and a relatively comfortable level of Opec spare capacity. Although demand has seen some improvement recently, this has been more than overwhelmed by the higher growth in supply. Additionally, in the light of ongoing risks, there is considerable uncertainty on the outlook for the second half of the year.
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