A recent surge saw crude oil prices gaining more than $10 since mid-December to break above the $80/b mark.
As a result of this upward push, the price of WTI averaged $82.48/b in the first week of 2010. With the
exception of 2008, this is the highest starting point in recent years. As the market had been
expected to continue to moderate, the jump in prices came as a surprise. Although prices have receded in
recent days, this raises the question as to whether there are any new factors in the market that would support a
higher price level or if the surge in prices represented only a temporary increase.
- Looking back at the oil price developments in 2009, one recalls that the sharp downward slide in prices was
halted in early 2009 following the OPEC decision to adjust production at the Oran meeting in December. Later,
the G-20 summit in April was instrumental in calming financial markets and supporting the emerging recovery in
equities which had already taken hold in early March. Massive government fiscal and monetary support on a
global scale was able to steady economic output and gradually optimism began to spread on signs pointing to a
recovery before the end of the year. Oil prices were supported by the resulting improvement in sentiment as
well as US dollar weakness and renewed activity in the paper market.
While the upward move in prices at the start of the year can be partially attributed to a global cold snap, it
cannot fully explain such a sharp increase, especially as inventories remain high enough to cope with any
sudden jump in winter demand. Although higher seasonal demand led to stock draws in crude and heating oil,
inventories remain at very high levels of 6% and 23% above the five-year average respectively, and floating
storage for crude and products continues to be high at more than 140 mb, the bulk of which is comprised of
distillates.
- The other factor contributing to the recent rally was a surge in investment flows in the commodities markets,
including oil. The combination of both bullish economic news and the colder weather has
increased the financial sector’s exposure to energy. Since the start of December, money managers have
boosted net positions by more than 70% to stand at 175,620 contracts in the week ending 12 January.
- In the coming months, oil market direction will mainly depend on a continuation of the current relatively positive
outlook for the global economy, especially in key countries such as the US and China. Should developments
turn out to be less positive than expected, market attention will revert back to weak oil fundamentals. Prices are
likely to be particularly vulnerable to economic developments during the upcoming low-demand second quarter.
- Although the overall situation is much improved compared to the same time last year, given the uncertainties
surrounding the strength and durability of the economic recovery and weaker seasonal demand, the OPEC
Conference decided to keep current oil production levels unchanged for the time being. The persisting stock
overhang, low seasonal demand and start of refining maintenance point to the need for continued caution over
the coming months as market volatility is expected to remain.
