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Oil price – Cold winter, hot market

Global Arab Network - - George Haddad

Tuesday, 12 January 2010 12:37

In the first few trading days of this year oil prices have broken decisively through the $80/bbl mark. Several factors explain the latest increase, but there are good reasons to be wary about the sustainability of such a price level.

The most important recent development is the much colder than normal weather in the Northern Hemisphere, which arrived midway through December. The winter in northern China could turn out to be the most severe for fifty years, while the US' East Coast might well be facing its coldest winter since 1982. So far, this icy blast has had only a limited effect on oil inventories, but it nevertheless provides a reason for oil traders to be bullish, most likely in the expectation that the scale of the inventory draw will only become apparent towards the end of January '10. Meanwhile, Russia and Belarus’ brief spat over oil transit prices served to remind traders that supplies to Europe remain vulnerable. The questionable health of the Nigerian president, along with MEND’s pledge to review the current ceasefire in the Niger Delta by mid-month, have also helped to make the market jittery.

However, while it is possible to explain the recent rise in the oil price, it remains difficult in our view to justify the base from which it rose. Dated Brent averaged $75/bbl in December ’09, a price level that is hard to explain given that the recovery in oil demand has been weak and inventories remain very high, China excepted. Crude stocks at Cushing, Oklahoma, the WTI contract's delivery point, are at a record high, for example, and the small draw in middle distillate stocks in the US for the week ending January 1st, despite the cold weather, suggests that tertiary stocks (those held by the end consumer) are still substantial. Had inventories come under serious pressure then the contango in the oil futures market would have flattened noticeably, but there is little evidence of this.

More generally, 2010 will present its own set of debt-related challenges that will threaten the economic recovery.
Once the scale of debt issuance is acknowledged interest rates will rise, led by the market for government bonds.

The global economy is finally in recovery mode thanks to a veritable flood of cheap government money and fiscal stimulus programmes in 2009, but the cost of generating the rebound will become increasingly evident during the course of this year and a growing awareness of this could lead crude prices lower, especially after the cold snap comes to an end.

Global Arab Network

Extracted from "CGES Weekly Outlook Release"

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