Market volatility was dominated by a number a factors in May, primarily speculative pressure, fluctuations in the US dollar and geopolitical concerns. A strike by port workers in France disrupting petroleum shipments and outages in West Africa further supported the bullish market momentum. Fear over tight supplies of light-end products amid persistent low refinery run rates kept alertness in place. Nonetheless, higher OPEC output and a move by Asian countries to reduced subsidies maintained some bearish sentiment. In monthly terms, the Basket reached a record-high of $119.39/b in May for a gain of $14.23 or 13.5%. In the first two weeks of June, the market came under pressure from fund sell-offs amid CFTC investigations. However, the start of the Atlantic hurricane season, low natural gas storage levels and speculative price projections by investment banks revived market bullishness. The fear premium was boosted by the threat of conflict in the Middle East triggering another wave of fund inflows in the futures market. The Basket surged to a record high of $130.87/b on 9 June before declining to stand at $129.77/b on 12 June.
World economic growth is forecast at 3.9% in 2008, unchanged from the previous month. Following a stronger-than expected performance in the first quarter, forecasts for the Euro-zone and the USA have been revised up slightly by 0.1% to 1.2% and 1.7%, respectively. Japanese growth is unchanged at 1.4%. US payrolls in May fell for the fifth month, as job losses rose by 49,000 and the unemployment rate surged 0.5% to 5.5%. The ISM services index remained above 50 for the second month, indicating that the bulk of the economy was still growing, albeit at a reduced rate, but manufacturing continued to contract. The dollar recovered from April lows but remained volatile at the start of June, as the US Federal Reserve signaled clearly that the monetary easing cycle was at an end, and the European Central Bank prepared the ground for a possible hike in July. Attention turned decidedly to the need for anchoring inflationary expectations. Inflation remains the main concern worldwide, fed by uninterrupted hikes in food and energy prices. India’s growth forecast was lowered to 7.6%, while China remains unchanged at 9.7% and Russia’s growth forecast was lifted 0.3 percentage points to 7.3%.
Consumption of winter products declined in the first quarter of 2008 in the OECD as a result of the below-normal winter temperatures. In addition, demand for transport fuel (mainly gasoline) in the OECD in general but particularly the US did not grow as expected as a result of slow economic activity and current oil prices. Growth in the other OECD regions was not enough to offset the decline in oil demand in the US in the first five months of 2008. The slowing US economy and the current price environment will affect oil demand not only in the US but also across the OECD in the second half of this year. In contrast, emerging economies are expected to show healthy growth in oil demand for the rest of the year. Despite the recent removal of price subsidies in some Asian countries, non OECD demand is expected to partially offset the decline in the US, Europe, and the Pacific. As a result, demand is forecast to grow by 1.1 mb/d in 2008 to average 86.9 mb/d, a reduction of 60 tb/d from last month’s forecast.
Non-OPEC supply in 2008 is expected to grow by 0.7 mb/d to reach 50.1 mb/d, a downward revision of around 50 tb/d compared with last month’s assessment. Downward revisions made to UK, Australia, Sudan and Kazakhstan were partially offset by upward adjustments made to USA, Argentina and Russia. OPEC NGLs and non-conventional oils in 2008 are expected to grow at 0.5 mb/d to reach 4.9 mb/d. In May, OPEC crude oil production averaged 32.2 mb/d, an increase of 343 tb/d from the previous month, with production in Saudi Arabia and Iraq witnessing significant increases.
Irregular circumstances in the crude market overshadowed positive developments in the product markets, undermining refining margins in Europe and Asia. The continuing volatile sentiment of the oil market along with slowing gasoline demand, particularly in the US, may also cap the seasonal bullish developments in the product markets and exert further pressure on the refining economics in the future. However, unplanned refinery outages due to a potentially active hurricane season could change the current prospects of the product markets lifting product and crude prices as well as refining margins.
OPEC spot fixtures dropped 0.6 mb/d in May to average 13.46 mb/d, which corresponds to two-thirds of total spot fixtures. Similarly, OPEC sailings fell a minor 0.21 mb/d to 23.25 mb/d, partially due to the refinery maintenance season. The tanker market sentiment remained bullish in May due to tonnage tightness which caused spot freight rates to increase on all reported routes in an unseasonal trend. The highest gain was observed in VLCCs trading between the Middle East and the East with an increase of more than 60% in spot freight rates from the previous month.
US commercial oil stocks dropped 4 mb in May due to a draw of more than 19 mb on crude oil inventories and a build of 15 mb in products. At nearly 306 mb, crude oil stocks are near the five-year average despite the drop which was driven by low imports following delays in the US Gulf Coast. Gasoline stocks remained within the range while distillate inventories continued to improve to approach the five-year average. In EU-15 plus Norway, total oil inventories followed their seasonal trend, jumping 15 mb to remain within the upper end of the five-year range at end-May. However, total inventories in Japan recovered further in April before surging 14 mb in May to move within the five-year range, according to preliminary estimates.
The demand for OPEC crude in 2007 is estimated to average 32.0 mb/d, an increase of 260 tb/d over the previous year. In 2008, the demand for OPEC crude is expected to average 31.8 mb/d or 130 tb/d lower than in the previous year.
