- Over the first two weeks of July, the WTI price lost more than $10 to slide below $60/b. However, by the end of the month, these losses were reversed and prices moved again above $70/b (see Graph 1). In the absence of any significant change in oil market fundamentals, this volatility indicates the increasing sensitivity of oil prices to conflicting economic signals.
The drop in prices in the first two weeks is related to negative news mainly In labour markets in the US and the Euro-zone as well as to the strengthening of the US dollar. In addition to recent dollar weakness, the upward price trend in the second half of the month has been mainly due to rising optimism about an end to the economic downturn. However, following an unprecedented deep and long global recession, large uncertainties persist about the timing as well as the path of recovery.
- While the US economy has recently shown some promising signs, expectations for a strong recovery may still be premature. Equity markets, which serve as forward indicators for economic recovery, have seen a strong recovery. The S&P 500 surpassed the mark of 1000 and is 48% above the recent low seen in March. Markets also reacted positively to data showing stabilization in the housing sector, as pending home sales improved further and house prices showed the first tentative monthly increase after three years of continuous drops.
Moreover, the contraction in the manufacturing sector slowed considerably. Markets also rose on news that the decline in US real GDP slowed to 1% in 2Q09 after a sharp 6.4% drop in 1Q09. Looking ahead, a sustained recovery in GDP would require growth in private consumption expenditures, which accounts for around 70% of GDP, and this depends on clear improvements in labour markets. The recession in the US has so far eliminated 6.7 mn jobs, higher than in previous recessions. Although the unemployment rate improved slightly to 9.4% in July, further deterioration is likely in the coming months.
- While Emerging Markets have performed better, indicators have also been mixed. In China, a massive fiscal stimulus package and loose monetary policy are generating stronger growth and this has been a key driver behind the spreading economic optimism. However, they have also triggered substantial investment in equity and property markets, which have pushed prices to levels that may prove unsustainable. Chinese equity markets have risen by over 90% so far this year, well beyond the recent rally in the S&P 500.
- The ongoing economic recession has continued to severely affect oil demand. This can be clearly seen in the decline in gasoline consumption, particularly over the driving season (see Graph 2). In the five years prior to the recession, US gasoline consumption over the period May-July experienced average growth of 1.4%. Over the same period this year, gasoline demand fell by about 2% y-o-y despite lower oil prices. This caused refiners to cut utilization rates, even during the peak driving season, further weakening crude oil market fundamentals.
- Additionally, oil inventories in OECD remain high and continue to rise, especially in the US. Reduced crude runs and lack of product demand have continued to contribute to an excessive accumulation of crude oil stocks, currently around 10% above the five-year average. Inventories at Cushing, Oklahoma, the point of WTI delivery, have now reached 33.4 mb, the highest level since March. With the upcoming seasonal refining aintenance, a deepening of the contango market structure would encourage further crude stockbuilds. As for products, the main concern ahead of the winter season is distillate stocks, which are globally at very high levels, not only on land but also in floating storage.
- In light of weakening fundamentals, the sustainability of current prices will mainly depend on clearer signs of improvement in the global economy. If market expectations for an economic recovery are not fully realised, current price levels could face increasing pressure. OPEC for its part continues to be firmly committed to strengthening oil market stability.