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Oil Market Challenges to Continue in Second Quarter |
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Saturday, 13 March 2010 |
 Oil prices have continued to be influenced by financial market developments, especially equities and currency fluctuations, although the link with the US dollar has somewhat weakened recently due to internal euro-zone problems, according to the latest Monthly Oil Market Report by OPEC. At the same
time, increased activity in the oil market has also supported crude oil
prices with money managers expanding net long positions.
This has taken
place amid conflicting economic data, creating uncertainty in the market
ahead of lower seasonal demand in the second quarter.
Despite continued positive signals about the global economic recovery
coming from the manufacturing and services sectors, there are some signs
that the momentum is slowing in some OECD regions in the first and
second quarter even as growth continues strongly in China and India. In
the US, data was mixed. While services picked up in
February, manufacturing growth moderated and housing sector problems
resurfaced as indicated by the latest negative round of home sales.
Despite some improvement, employment also remains at historically high
levels.
In the Euro-zone, the expansion had already slowed in the last quarter
of 2009 with the region recording a meagre 0.1% quarter-on-quarter
growth from 0.4% in the previous quarter. Germany, the largest economy,
was flat, while countries in southern Europe contracted. Although the
outlook for the current and the coming quarter may be slightly better
than in 4Q09, the recent turbulence in financial markets related to
Greece’s fiscal problems has unsettled the euro and the fallout has
impacted confidence and drawn attention to the divergence in growth
potential and fiscal stance among the various countries in the
Euro-zone. In Japan, while a recovery in exports has boosted industrial
production, the pace of recovery is expected to slow in the first
quarter and high government debt has initiated a debate on the need for
increased taxes.
Amidst the uncertainty about the pace of the recovery, the oil market is
heading towards the lower demand season.
In the five years preceding the recession, the seasonal decline in oil
consumption between the first to the second quarter typically averaged
1.8 mb/d. However, the current forecast suggests that, due to base
effect, world oil demand is declining by only 0.8 mb to average 83.9
mb/d, about half of the average seasonal contraction. Since non-OPEC
supply is expected over this period to decline by 0.2 mb/d — in line
with the seasonal norm — demand for OPEC crude is expected at 27.8 mb/d,
representing a lower-than-average decline of 0.8 mb/d.
However, despite this relative improvement, the projected demand for
OPEC crude is still much less than current OPEC production by around 1.5
mb/d. If only part of this surplus were translated into OECD commercial
inventories, this would result in further stock build, adding to the
already inflated levels of more than 90 mb above the five-year average.
Indeed, OECD stocks have already showed a contra-seasonal build in
January, driven by both crude and products.
Moreover, product demand will not be supportive of the market as the
winter season is coming to an end.
Weather-driven demand for middle distillates has dissipated, and there
is little sign of an improvement in the diesel market. Additionally,
with the continued rise in US gasoline stocks and surging ethanol
volumes in the gasoline pool as well as ample idle refinery capacity,
any seasonal upward movement in the gasoline market is likely to be
limited.
Overall, the outlook for fundamentals reflects the traditional weakness
of the current quarter. Even taking into account the uncertainty
regarding demand for OPEC crude, current OPEC production is likely to
exceed market needs. While, this, along with the steady rise in spare
capacity in both the upstream and downstream, provides a further cushion
for the projected increase in oil demand in the second half of the
year; nevertheless, the present quarter calls for continued caution and
close monitoring.
Makis Theodoratos, Hellenic Shipping News Worldwide
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