The oil market still seems over-supplied, given ample inventories, an increase in OPEC and non-OPEC production, and high surplus capacity within OPEC. This supply, and a weak global economic recovery, could mute some of the pressure on the oil price. Fundamentals do not always drive prices–one might expect an oil price closer to $50-55 per barrel today–but they can be restraints.
With the U.S. Federal Reserve set to remain on hold–likely into 2011 in RGE’s view–global liquidity conditions should be supportive of oil and other commodities. Any pressures on the U.S. dollar could strengthen oil. The fundamental outlook, however, could restrain this upward pressure.
Muted Demand to Continue
The sharp fall in demand for oil in 2009 following a shallower decline in 2008 marked the first back-to-back oil and oil product demand declines in two decades. At the end of 2009, oil and product demand began to recover, but they remain well below 2006 and 2007 levels. The strong pace of growth in emerging market economies, particularly in Asia, suggests EM fuel demand will be strong, only partly offsetting weak demand in OECD economies, making the global rebound in demand more muted than in 2004-2007.
Despite the auto industry-focused nature of the fiscal stimulus in many countries–especially China–the incentive to buy more fuel-efficient cars suggests the growth in oil product demand will continue to be more muted than this buying surge would indicate. Moreover, with prices tied more closely to global market prices, more of a price increase would be passed on to the consumers in China. Other Asian countries have likewise poked holes in their subsidy regimes. Finally, the addition of refinery capacity in the Middle East and Asia removes one price pressure as the chance of product shortages are lower.
via munknee.com
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