OPEC says the oil market has entered a new environment where the old rules no longer apply.
The deterioration in demand, coupled with a build in supplies was supposed to drive prices further down. Instead, the price of oil has stablized, and even risen considerably. “Between February and May 2009, inventories and prices switched from the traditional inverse relationship to move in parallel, with higher inventories coinciding with higher prices.”
Now, the price of oil moves with the equity market, where the general sentiment is that the worst has passed, and recovery is on its way. With that recovery, demand for oil is expected to return.
OPEC kept its expectations for demand in 2009 relatively flat, revising its demand projection slightly lower to 83.8 million barrels per day, versus 84.03 mbd from its May report. Yesterday, the IEA revised its 2009 demand projections upward. It still expects oil demand to be down from a year ago, but not as badly as previously believed.
This optimism about demand returning could fade fast if the recovery doesn’t materialise in hard data. As David Rosenberg said a few weeks ago, the “onus is now on the bears.” The bulls will run, but if we don’t see solid macroeconomic data in Q3 that supports today’s optimism, this rally in equities, and oil, could crash. Here’s OPEC’s version of the same story:
A key uncertainty facing the market is the sustainability of the more optimistic sentiment currently in the market, which will largely depend on improvements in the real economy and in financial markets. While the acute tightness in credit markets has begun to ease and equity markets have staged a steady recovery – although from a low base – economic prospects for the coming quarters remain uncertain. Despite spreading optimism that the deep economic downturn may reach bottom in the coming quarters, the world economy is still facing considerable challenges. In the OECD region, unemployment is still rising; bank balance sheets remain shaky; and private consumption, investment and exports are expected to remain subdued. These concerns could dampen or delay a global recovery. Moreover, markets are beginning to worry about the consequences of the huge public deficits.
While OPEC sounds cautious here, it also says, “the worst appears behind us.”
A few other highlighted items in the report:
- OPEC also says that the summer driving season won’t have much affect on the oil market, “under the current economic situation, gasoline demand is not expected to increase significantly in the coming months and hence would provide only limited support for the oil market.”
- The contango spreads were very attractive for a while, which led to a big build in supplies. However, now OPEC thinks OECD inventories have peaked, and contango spreads are less attractive. As a result, “seasonal demand changes and the narrowing contango should also support a decline in the overhang in OECD crude stocks and floating storage, although from very high levels of 70 mb and 100 mb respectively. “
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