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Oil prices rebound reflects optimistic economic outlook

Global Arab Network - - Mohammed Almasri

Tuesday, 22 June 2010 16:40

After falling by almost 25% during the first three weeks of May, oil prices staged a recovery in the first half of June, clawing back around half of their recent losses. The sharp fall in prices was a reaction to the Greek financial crisis and concerns about European economies. Their recovery reflects a more optimistic outlook for economic growth in the US, which has translated into a surge in middle distillate deliveries but is not yet fully reflected in the futures markets. China continues to pull large volumes of crude oil eastwards from the Middle East and West Africa, but it may once again start to face competition for that oil from the world’s largest consumer.

As oil demand growth returns, the US is once again starting to emerge as a major influence on oil prices.

The surge in middle distillate deliveries, as haulage firms benefit from the rebuilding of industry’s inventories that were run down as the recession bit, is a physical reflection of the more optimistic outlook for the US economy. US refinery inputs have also staged a dramatic recovery during the second quarter and are now back at levels not seen since the summer of 2008, spurred mainly by growing demand and slightly improved margins that resulted from the slump in crude oil prices. In sharp contrast to the US, more than 20% of European refining capacity remains shut in.

Oil supplies are abundant, with non-OPEC output expected to grow by around 600,00 bpd for the second consecutive year in 2010. In the short term, the ongoing oil leak in the Gulf of Mexico should have little impact on oil production, although it may trigger a more cautious approach to hurricane-related shut-ins. A prolonged drilling ban, though, could start to undermine production by the end of the year, given the rapid natural decline rates of deepwater wells.

While recent economic developments in the US are supportive of oil prices, global oil inventories remain abundant and may put a cap on price rises for some time to come. Although the volume of refined products held in floating storage has fallen steadily since Dec-09, offshore crude oil stocks have risen and, at 90 mn bbls, are back at their peak levels of a year ago. The CGES estimates that global oil inventories (outside the former centrally-planned economies of the FSU, China and Eastern Europe) were sufficient to cover 75 days’ worth of forward demand at the start of 2Q10, one day down on the same point last year, but still five days higher than at the start of 2Q08.

Despite the recent oil demand surge in the US, the CGES remains of the opinion that the rate of global demand growth, which has averaged more than 2.5% in the first half of 2010, will ease in the second half of the year. The strong growth in the first half of 2010 reflects the even larger 3.2% fall in demand in the first half of last year. In contrast, the second half of 2009 saw a modest rise of 0.7% in global oil demand and this year’s growth is expected to be correspondingly lower at around 1.1%.

Where oil prices go from here will depend very much on the pace of economic recovery during the second half of 2010. Although the signs from the US appear encouraging, the outlook for Europe is much less optimistic. European economies remain in the doldrums, as governments begin to introduce austerity measures in the face of ballooning deficits. The CGES expects oil prices to remain volatile around a flat trend for the rest of 2010.

Global Arab Network

Extracted from CGES report - Centre for Global Energy Studies

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