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CRUDE futures remained above $75/b throughout November, exceeding $80/b early in the month before trading down to just over $77/b on 20 November. On the surface, that gives plenty of comfort to producers. Opec says $75/b is its target, while even deep-water specialists such as Petrobras can continue drilling pricey offshore regions at a much lower price.
What will concern them is that it is not the fundamentals that are sustaining these prices, but weakness in the dollar and buoyancy in equity markets. The fundamentals of supply and demand remain bearish. Demand continues to surprise analysts with its sluggish response to signs of economic recovery. The IEA expects consumption to grow by about 1.3m b/d in 2009, to 86.2m b/d. Opec expects incremental demand of about half that figure. However OECD stocks, in particular US inventories, remain historically high. At the end of September, OECD cover had reached 60 days, almost four days higher than a year ago.
More worrying is evidence that traders are storing oil in tankers to take advantage of the market's contango (see p31). The amount of oil in floating storage could be around 120m barrels, enough to account for all of the incremental demand in Opec's 2010 forecast. And refinery utilisation is slumping. US throughputs are below 80% and expected to remain there until the end of the year.
All of this points to an oil-market slump, especially if macro-economic factors affect sentiment. Any sign of a tightening of US interest rates in response to inflation worries, for example, could boost the dollar and send oil prices tumbling.
Meanwhile, the OECD says unemployment in rich countries is likely to remain stubbornly high in 2010. With products prices rising on the back of a still-strong crude price, demand destruction could follow. IHS Cera says OECD demand may have peaked for good. A structural change in consumption among developed nations could pull the rug from beneath the price, sooner rather than later.
