Posts Tagged ‘Crude prices’

CRUDE OIL…. “Black Gold …Key driver of Global Economy”

Crude oil is the key driver of every economy therefore it is known as “Life blood of Economy”. It has shown lot of volatile movements but has shown resilience despite below expectation US economic numbers and euro zone crises in May this year. Crude prices have more than doubled since dropping below $35 late in 2008, but are still significantly lower as compared to the record high near $147 a barrel in July 2008.

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Crude prices have been trading in wide range of $65 to $90 since last August 2009 .Crude prices have weathered the euro  zone crises very well as they did not break this wide range.

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In the month of June and July, the fall in the greenback and recovery in global equity markets have supported the prices higher. The pace at which crude oil is being used across the globe as fuel in transportation and its other byproducts in industrial applications, it is expected that prices will be well supported. Furthermore, the lack of major alternative fuel of crude and ever shrinking oil wells, coupled with lack of new exploration will give the bull’s upper hand in long run.

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But, as we have seen in the stunning run up to $147 in 2008 and then plunge from that high to below $37, it can be said that it is the speculative forces that run the crude oil more than the true fundamentals of supply and demand.

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The other energy source is natural gas and it’s available due to new found Shale gas supply in US but due to lack of proper infrastructure in place it is quite tough to presume natural gas to become a tangible replacement for oil any time soon.

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Today, China is the world’s largest consumer of energy. Continued demand of Chinese and Indian economies may support the crude prices in long term. But China’s crude oil imports in July fell 3.2 percent from a year earlier after record inbound shipments in June which has capped the upside.

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As the hurricane season in US is from 1 June to 30 November so hurricane premium also support the prices during this period. Recently hurricane premium has been seen in the crude prices as the prices did not see major sell off despite increasing stockpiles. Furthermore recovery in the global equity markets tends to be supportive for the prices.

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As the cost structure of drilling and exploration has gone up so the marginal cost of production has also increased. Companies are benefiting at present where crude oil prices hover between at $75 to $80, but if we do see upward pressure on the cost structure, again, over time we do see a rise in oil price.

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Recently contrasting economic data between the US and Euro zone as well as the earnings performances of the banking sector has been seen which continues to shore up the euro on the premise of broadening stabilization of interbank concerns and to a lesser extent robust recovery in Germany.

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OPEC opted for production cuts in earlier this year and 11 countries adhered to compliance except Iraq. OPEC countries boosted output from 24.845 million b/d by 80,000 b/d to 26.82 million b/d for the July 2010. This exceeded the OPEC 11 target by 1.975 million b/d and puts the group’s compliance rate at 53%.But in order to meet the growing demand OPEC produced an estimated 29.4 million b/d of crude oil in the second quarter of 2010 after remaining relatively steady for the past four quarters.

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US Distillate demand —-Pointer to industrial recovery

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The fall in the distillate demand in US is also a concerning factor as far as the demand scenario is concerned. The main driver of distillates demand is heavy use by industrial sector, which has been severely lacking in the second quarter. The U.S. actually had a year on year increase for distillate demand between 2009 and 2010 as high as 17.1% for the last week in May but it has cratered to +2.2% year on year in two months time.

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The stockpiles of distillate fuel in July month is at the highest level since the week ended Oct. 16. 2009. And this distillate inventory builds will cap the upside in the crude oil.

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Analysis:-The absolute change in the EIA crude inventories has shown fluctuation in wide range of -8 million barrels to +8 million barrels in the total weekly crude oil supply data.

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Current scenario

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Crude oil which often tracks events in the global economy is very much affected by the turbulences that take place in various key economic powerhouses. At present when the hysteria around the euro zone crisis began to subside, fears of US economic slowdown have begun to intensify. US recovery is still causing as indicated by its weak housing and labor markets.

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This slowdown is also captured in all the economic reports over the last two months, from housing and manufacturing, to employment and GDP. All these economic reports are below the expectations, and prior reports are being revised down. It appears the US economy really slowed down over the last two months in particular.

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The crude oil outlook going forward in rest of the quarter is quite bleak as the bulk of the summer driving season in US is over, and now we have less demand and inventory is rising at the same time in this commodity.

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