Can crude oil recapture $100
By Active Trader StaffOver the past year, bullish traders have been driving crude oil prices higher. Despite some stops and starts, the overall trend has clearly been to the upside. From March 2009 to late January 2010, front-month crude oil futures doubled in price from $40 to more than $80 per barrel.
A major theme supporting the upward move in crude oil and many other markets was expectations for global recovery. This means higher demand for crude oil and other energy needs. Indeed, that global recovery appears to have arrived.
As of late January, the International Monetary Fund (IMF) upwardly revised their 2010 global growth forecast to 3.9 percent. However, the IMF foresees growth in advanced countries averaging only 2.1 percent this year, while Asia will continue to lead world growth with China hitting 10 percent in 2010 and India near 8 percent.
However, while global growth is picking up steam, the crude oil supply-demand dynamics have shifted in recent months, so higher growth rates won’t necessarily translate into steadily higher crude oil prices.
“We can look for another run to the upside in the second half [of the year], but this is not a smooth escalator ride to $100,” says Tim Evans, analyst at Citi Futures Perspective. “It’s more like an amusement park ride with an occasional sharp decline.”
Crude oil’s underlying fundamentals helps clarify the situation.
Crude supplyWith two sides to the supply-demand equation, Evans calls the supply outlook “the most under-reported, under-discussed aspect of the oil market.” As global demand for crude oil retreated in 2009, some inventory remained in the market. Also, “U.S. domestic crude oil production is running 10 percent higher year-over-year,” he says.
Pointing to Department of Energy (DOE) data, Evans stresses that the four-week production average as of Jan. 15 stood at 5.480 million barrels per day (bpd), 10.2 percent higher than the same period one year ago.
“The moral of the story is, don’t focus solely on the demand side because the supply side is changing too,” Evans says.
Table 1 shows crude oil’s supply is forecasted to outweigh its demand in Q2 2010.
(MMBPD)
|
DOE |
IEA |
OPEC |
Demand
|
84.64 |
85.65 |
83.75 |
Annual growth %
|
1.30 |
1.70 |
1.00 |
Non-OPEC supply
|
50.83 |
51.40 |
51.19 |
OPEC NGL supply
|
5.32 |
5.60 |
5.19 |
Call on OPEC crude oil
|
28.49 |
28.65 |
27.37 |
December OPEC production
|
29.16 |
29.05 |
29.14 |
Implied surplus (deficit)
|
0.67
|
0.40 |
1.77
|
“We have a supply overhang,” says Tina Vital, global integrated oil and gas analyst at S&P Equity Research. “OPEC (Organization of the Petroleum Exporting Countries) spare capacity is up to over six million bpd. There are a number of major project starts worldwide. We think the excess spare capacity will remain high over the next couple of years.”
“Historically, OPEC hasn’t seen this kind of increase in spare capacity in quite awhile,” Vital says.
Overall, OPEC countries have increased oil production over the past year. Evans points to International Energy Agency (IEA) data showing total OPEC production climbing from 28.07 million bpd in February 2009 to 29.05 million bpd in December 2009.
“It is up almost one million barrels per day,” he says. “This is a significant increase.”
Another key factor is refinery capacity. The U.S. refinery operating rate was 78.4 percent as of Jan. 15, according to DOE data, down 4.9 percent from last year at this time. The operating rate is also lower than its five-year average, which stands at 87.3 percent.
Why do refinery operating levels matter?
“We have spare refining capacity,” Evans says. “The only reason inventories are not even higher is because refiners are holding back.”
For the complete article, see the April 2010 issue of Active Trader magazine. Click here to subscribe.
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