OPEC report: $90+ oil not linked to supply issues

“Since mid-November, US benchmark crude oil prices have jumped by more than $10/b or 12% to break above the $90/b mark. Over the first two weeks of the year, WTI prices averaged almost $90/b. With the exception of 2008, this is the highest start to any year on record. Brent saw an even stronger increase of almost $12/b or 14% over the same period, while Dubai experience a lower gain of $7/b or 8%. Following the relative price stability seen for most of 2010, this has raised concerns about whether prices will persist at these higher levels or if this is only a temporary phenomenon and prices will correct over the coming weeks.

Among the key factors contributing to the recent price surge has been the early onset of winter weather. This has led to stronger heating oil demand as well as a decline in crude oil stocks above the seasonal average.

Some forecasts calling for a revival of crude oil demand and a perceived potential for tightness in the market over 2011 have also contributed to the price rise. Additionally, bullish market sentiment and a surge in investment flows into major commodity markets including crude oil have also pushed prices higher. Indeed, speculative activities in the crude oil futures market, as represented by net long positions of money managers, reached a record high in the week ending 28 December 2010.

As mentioned, the rise in crude is part of a general increase across commodities as a whole, as expectations about a continued improvement in the global economy have supported increasing commodity investment. Gains in most major commodities since the start of the year have even outpaced the 10% increase in crude oil. Agricultural commodities have risen the most with corn prices jumping nearly 50% and wheat up by more than 40%. Precious metals have also moved higher with silver and gold increasing by nearly 30%.

The recent surge in prices cannot be fully explained by a change in oil market fundamentals, as global stocks point to a continued well-supplied market. Despite a stronger-than-usual seasonal crude draw, US crude inventories remain comfortably at 75 mb above the five-year average. Product stocks also show a surplus of 46 mb over the seasonal average. At the end of the year, other OECD regions, such as Europe and Japan, have even experienced counter-seasonal builds. Some extra barrels also remained available in floating storage. So, while the total overhang in inventories has declined since August, global inventories continue to be high.

Additionally, in the likelihood of a strong rise in demand or any sudden supply disruption, OPEC holds around 6 mb/d of spare capacity which could quickly be made available to the market. Expected demand for OPEC crude for this year stands at 29.4 mb/d, slightly above the current estimation of OPEC production. A closer look shows that demand for OPEC crude in the first half of the year will be lower than current OPEC production of 29.2 mb/d, which would result in a growing stock cushion. It is clear that the overall economic situation has brightened since the start of last year, and expectations for a sustained improvement, particularly in key emerging economies such as China and India, will continue to influence oil market direction.

However, important risks still remain which could impact crude oil prices over the coming months. These include rising sovereign debt concerns in some OECD countries; weaker-thanexpected oil demand growth in 2011; excess crude and product inventories, both onshore and offshore; and higher spare capacity in both the upstream and downstream sectors.

As this shows, the oil market continues to face significant uncertainties. A clearer picture will emerge with the end of the winter season, as the market heads into the lower demand second quarter. Until then, there is an adequate cushion of supply in both inventories and spare capacity to meet the supply needs of the market.”  

Data and information taken from the OPEC January 2011 Monthly Oil Market Report