The improving economic scene, both here in the U.S. as well as worldwide, had been the main driver of the oil rally that saw the commodity zoom past the $85 per barrel level in late April/early May 2010.
However, in recent days, concerns about the European debt crisis and China's growth outlook have renewed apprehensions about the global growth and energy demand. As a result, oil prices have slumped to around $76 per barrel. Additionally, high levels of product inventories (gasoline and distillate stocks remain above the upper boundary of the average range for this time of year), along with soaring commercial oil supplies, has further dragged down crude prices, in our view.
But far too many factors weigh on oil prices -- from OPEC decisions and geostrategic tensions to the value of the U.S. dollar and seasonal variables -- to definitively size up each one of them for their respective impact on prices.
In its latest release, the Energy Information Administration (EIA) reported a higher-than-anticipated decrease in crude stockpiles, which fell by 5.1 million barrels for the week ending July 9. Though the weekly plunge in oil supplies makes for a bullish reading of the EIA report, at 353.1 million barrels, crude supplies are 8.6 million barrels above the year-earlier level and remain over the upper limit of the average for this time of the year.
Additionally, we remain concerned in light of the high gasoline inventory build and a sequential distillate inventory build. During the reporting week, domestic gasoline volumes hit an all-time high, while production of middle distillates climbed to their highest level in six months, even as demand tapered off for both the products.
As such, crude oil's near-term fundamentals remain weak, to say the least.
According to the EIA, world crude demand for 2009 was below the 2008 level, which itself was below the 2007 level -- the first time since the early 1980's of two back-to-back negative growth years.
However, the agency also provided some positive news in this otherwise bleak supply-demand picture. According to the EIA, the decline in oil demand bottomed out in the middle of 2009, as the world economy began to rebound in the latter half of the year. The agency, in its Short-Term Energy Outlook, said that it expects this recovery to continue in 2010 and 2011, contributing to global oil demand growth of 1.5 million barrels per day in each of the years.
Recently, the Organization of the Petroleum Exporting Countries (OPEC), an intergovernmental organization that supplies around 35% of the world's crude, gave its first assessment for 2011, forecasting global oil demand to grow at about the same rate as this year. In its latest monthly oil report, OPEC said it expects world oil demand to grow by 0.95 million barrels per day in 2010 and 1.05 million barrels per day in 2011, representing growth of 1.1% and 1.2%, respectively.
However, the third major energy consultative organization, the Paris-based International Energy Agency (IEA), the energy-monitoring body of 28 industrialized countries, said that global oil demand growth will slow next year on the back of less government money being pumped into the economy by the advanced Western countries. IEA predicts that oil demand will average 86.5 million barrels a day in 2010 (or 1.8 million barrels a day increase from 2009) and 87.8 million barrels a day in 2011 (or 1.3 million barrels a day increase from 2010).
We expect crude oil to trade in the $75 – $85 per barrel range in the near future, supported by the rising consumption in emerging and developing economies, led by Asia. But this does not mean that we will not see any short-term pullbacks. On the whole, we expect oil prices in 2010 to be higher than 2009 levels, but remain significantly below 2008 peak levels.
Though the ongoing surge in natural gas demand has erased a hefty surplus over last year's inventory level, following a high of 101 billion cubic feet (Bcf) for the week ending April 23, the specter of a continued glut in domestic gas supplies still exists, with storage levels remaining 11% above their five-year average. In fact, the latest build, though in-line with market expectations, has sent natural gas inventories to a level not normally reached until the second week of August.
Further pressurizing the commodity is the rapid rise in the number of drilling rigs working in the U.S.
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