Economic woes, stockpiling continue to hurt prices

Now that the Group of 20 nations meeting in London is over, and oil prices received a much-needed bump based on optimism there, the next chapter is due to unfold in just a few days when the International Energy Agency (IEA) releases its next monthly report on Friday.

According to a variety of reports, there is a good chance that the IEA is going to take an axe to its previous energy consumption predictions.

It is probably even a sure thing, considering the IEA's Executive Director Nobuo Tanaka said there is a "high probability" it will happen in an interview with Bloomberg.

What remains to be seen is how large the cut will be, and how big of a bite it will take out of the gains oil has made recently.

Overall, I still don't see the market fundamentals for oil as very strong.

Despite all of that well-noted optimism in London, and the trillions of dollars US President Barack Obama plans to dump into the US economy, I don't see a short-term end to the recession.

Jobless figures are still in pretty depressing territory, the housing and credit markets remain in shambles and consumer optimism is verging on nonexistent.

According to new figures just released by the US Labour Department, employers slashed 663,000 jobs in March, bringing the total number of lost jobs to 5.1 million since December 2007. These are widely touted as the worst job figures in the postwar era.

With unemployment more than a whopping 10 per cent in seven states, including one-time powerhouse California, it is easy to see that any turnaround is going to take some time to get under way.

So until we get some solid economic numbers - instead of just hope and sunbeams - we're not going to see the demand for crude that is necessary to bring prices back up.

Along with those factors, countries are stockpiling oil.

In the United States, supplies of crude rose to their highest level since July 1993.

And the North American nation is hardly the only place looking to load up on black gold while prices are relatively low.

The China Daily News reported that the Chinese government wants to triple its current petroleum reserves, which are supposedly enough for 30 days' supply at present.

But with eight new crude reserves set to come online in 2011, China is definitely taking the long view.

So why should we care that countries are stockpiling?

Well, if you are an oil producing nation - say, an Organisation of Petroleum Exporting Countries member - you might be a little nervous that significant stockpiles could be used to flatten out any potential price rise, or even depress the price further.

Stockpiling also gives investors the impression that demand for new crude may be lower than it actually is, which, considering how they behaved during the bubble, is worrying news indeed.

It is hard to forget that speculative investment helped create that ridiculous price bubble that sent crude over $140 (Dh514.92) a barrel. Watching prices fluctuate on every international incident since then hasn't restored my faith in the reliability and knowledge base of even institutional investors.

So, we'll just have to wait and see how far the IEA revises its consumption predictions downward. Then maybe we'll have some concrete information to work with.

- The writer is a freelance journalist based in Alaska, USA.