Oil fundamentals point to further falls
May 17, 2012
Oil prices have tumbled by more than 12% since their 2012 highs around $125 a barrel. They look likely to keep sliding. Not only has investors’ risk appetite dwindled, but “there’s too much supply and too little demand”, says Alan Abelson in Barron’s.
As far as demand is concerned, the recession in Europe and the patchy recovery in America – with the latest survey tracking the non-manufacturing sector and unemployment data both disappointing – are undermining sentiment. China’s downturn has been steeper than expected, with industrial production expanding at the slowest rate in three years last month. China’s oil demand has fallen to a six-month low, according to Reuters data.
In the meantime, American stockpiles have risen to a 21-year high. That follows the first uptick in global oil inventories in two-and-a-half years last quarter. This is partly due to Opec ramping up production and more oil coming onstream in Libya as production facilities have been repaired. Supply is now “plentiful”, says Commerzbank’s Carsten Fritsch, so
don’t expect a rebound to recent highs anytime soon.
Indeed, only tension with Iran is propping up the oil price, and this could well ease at talks later this month, says Capital Economics. EU sanctions against Iran may be put on hold. Still, as Gary White warns in The Daily Telegraph, given how unpredictable the Iran imbroglio has become, shorting oil is only for “the very brave”.
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.