CRUDE OIL: Energy agency warns of a price bubble

AFTER staying range-bound for over a year, global crude oil prices appear to have broken a key resistance level and headed northwards. Several factors are at play. Among the key factors that have boosted oil prices is a sustained increase in demand, especially from the OECD countries, during the last few months. Global oil demand in the September 2010 quarter was higher by 3.1 mbpd y-o-y, continuing the acceleration since the beginning of 2010 — 2 mbpd y-o-y growth in the March 2010 quarter and 2.8 mbpd growth in the June 2010 quarter. On a sequential basis, the demand in the third quarter at 87.5 mbpd was nearly 1.5 mbpd more than in the second quarter of 2010. This made the International Energy Agency (IEA) revise upwards its earlier demand growth estimates for 2010 by 0.2 mbpd. The latest estimates peg the world’s oil demand to average 87.3 mbpd in 2010 — 2.3 mbpd or 2.8% higher against 2009. OPEC countries increased production, but non-OPEC countries registered a sequential fall in output during the September quarter. This resulted in a reduction in oil inventories the world over. In the US, for which weekly inventory numbers are available, oil stocks have fallen by 37.5 million barrels from the beginning of September till end-November. In Europe, the inventories fell substantially in September and continue to remain below the year-ago level in spite of a marginal growth in October.

Traders remain bullish on crude oil, since the US dollar is likely to remain weak thanks to ‘quantitative easing’. The revised demand forecasts by institutions such as IEA as well as OPEC mean that the signals appear to be more bullish than bearish.
These developments do not bode well for India, whose oil import bill and budget deficit will swell if oil prices continue to rise. Similarly, under-recoveries for state-run oil companies will start moving up. According to a research report by brokerage firm Edelweiss, under-recoveries on the sale of diesel averaged . 3.3 per litre in November 2010 from . 2.3 in October. “Based on crude and product prices as on November 30, 2010, gasoline and diesel under-recoveries are at . 1.3 per litre and . 4.9 per litre, respectively,” says the report.
Rising oil prices would spell bad news also for economies struggling to recover after the economic turmoil during the last few years. The IEA has warned of a renewed price bubble, built from a perception that there could be tightening in the oil markets in the near term. “This points to the possibility of weaker 2011 GDP growth, and, thus, the oil demand,” the report says. If that is the case, high oil prices may not be sustained in 2011.