Business | Oil & Gas
Demand for oil still fragile
The oil market performance in June continued the buoyancy of the last four months and the average price of the Opec basket of crudes reached $68.63 (Dh252.08) a barrel compared to $56.98 in May, the highest monthly appreciation since the recovery from the $38.60 price in December 2008.
- By Saadallah Al Fathi, Special to Gulf News
- Published: 22:53 July 5, 2009
The oil market performance in June continued the buoyancy of the last four months and the average price of the Opec basket of crudes reached $68.63 (Dh252.08) a barrel compared to $56.98 in May, the highest monthly appreciation since the recovery from the $38.60 price in December 2008.
The price even reached $70.87 on June 11 and although there were swings of almost $5 a barrel, the resulting average, in my opinion indicates some kind of stability.
The ups and downs during June could be attributed to troublesome news from some producing countries such as the damage caused by some attacks on Nigerian oil facilities or the turmoil in Iran after the election and the fear that it might affect oil production there.
However, these positive developments are overshadowed by fears of the fact the price rally is not supported by fundamentals.
It is true the economic outlook, and people's perception of it, has slightly improved but the world economy is far from any growth this year and the announced increase in the household saving rate in the US is taken as an indication of slower recovery there. The latest estimate by Opec is that the GDP is likely to contract by 1.3 per cent in 2009 and the spending by governments is yet to give results and unemployment keeps rising in spite of this spending. People are certainly hoping but they have not yet put their faith wholeheartedly in a recovery that will make them spend more.
Oil demand is still fragile and very much less than 2008, though no further reductions in forecasts have been seen lately. In fact the International Energy Agency (IEA) increased its forecast in June for 2009 by some 120,000 barrels a day (kb/d) to 83.3 mb/d compared to the Opec Secretariat estimate of 83.8 mb/d. Supplies from non-Opec are forecast to reach 55.7 and 55.2 mb/d by the IEA and the Opec Secretariat respectively, both lower than 2008 levels.
Therefore, Opec crude oil production to balance the market is forecast at 27.7 and 28.6 mb/d by the IEA and Opec Secretariat respectively. A difference of 900 kb/d between the two forecasts is difficult to explain as they are normally closer.
It is probably a new trend where Opec is more optimistic about the oil market. In any case both forecasts do not support the increase in oil prices that the market has seen in June.
Many analysts expect sooner rather than later that some correction is forthcoming and some of them were even surprised that it did not happen in the second half of the month.
This is why Opec Secretary-General Abdullah Al Badri in a recent press conference called on member countries to be more compliant with their production allocation.
Depending on the level of the price correction, if any, Opec may have to look again at the compliance of its members accordingly. The market is however approaching the higher demand season in the third and fourth quarters of the year where more oil is to be expected from Opec or from the high oil stocks in the consuming countries. The stocks are at their highest level in memory and they will continue to overhang the market for sometime to come.
Recent statements by Opec still point to a desired price level of $70 to $80 a barrel in order to allow for investment in future capacity upgrade. The decline in prices in 2008 has already caused the cancellation of many projects to the detriment of future needs.
It is indeed advisable for Opec to allow the market to take its course where a slow rise in prices may not adversely affect economic recovery. The level of prices desired by Opec even received some support from the European Union in its recent ministerial meeting with Opec where it was said in the press conference that an additional $10 a barrel would facilitate investment in future supplies.
The dissociation between fundamentals and the oil price movement in recent months and especially in June has been explained by some by the development in the stock markets and the return of speculators to the futures markets, where a much higher activity is observed judging by the volumes traded. However, one hopes the speculators will not be able or allowed to build another price bubble that could send the market in a new spin.
- Saadallah Al Fathi is the former head of Energy Studies Department at the Opec Secretariat in Vienna.
More from Oil & Gas
More from Business
Business Editor's choice
-
DFSA chief to step down in September
Executive has been at post since 2008
-
Geepas idea blossomed in Dubai
The journey led from a small shop in Bahrain to a $1.27b company in the UAE
