Is it time to buy back into oil?
Jan 15, 2010
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American oil futures jumped by 78% in 2009, and recently they hit a 15-month high close to $84 a barrel. They were boosted by a weaker dollar, the cold snap – which has improved demand for heating oil – and the news that China's crude imports had jumped 20% month-on-month in December. "Oil is determined to rise," says Eugen Weinberg of Commerzbank. But investors should watch out. Given the uncompelling fundamentals the latest uptick is largely down to bullish speculators flooding into the market.
For starters, notes Weinberg, Chinese imports aren't an accurate reflection of Chinese oil demand as exports of refined products rose at the same time. American petrol inventories rose last week, with the implied demand for petrol now down to the lowest level in a year. The stock of distillates, including heating oil, only fell marginally last week. "It's going to take two very severe winters to consume all the distillate fuels that have been stored both onshore and in floating storage facilities," says Victor Shum of Pervin & Gertz. American crude stocks also rose last week, while across the OECD, crude and oil product stocks remain historically high at around 60 days of demand.
The big picture is that "demand remains relatively subdued" in the OECD and the US (the world's biggest energy consumer), says Fiona Maharg-Bravo on Breakingviews. With strong emerging market demand only partly offsetting weak OECD demand, high Opec surplus capacity, and higher non-Opec production, supply is likely to "continue to outpace demand in 2010", says Nouriel Roubini of New York University. Global demand won't eclipse supply until mid-2011, agrees Goldman Sachs.
Meanwhile, "easy money and the weak dollar" may have made all commodities an attractive bet, says Maharg-Bravo. But liquidity is set to be withdrawn this year and interest-rate hikes could be accelerated if inflation emerges. That implies a stronger dollar, which could also jump if global growth slumps. The fundamentals should come to the fore this year, agrees Deutsche Bank. With plenty of scope for setbacks, as the global inventory bounce wears off and underlying demand proves weak, oil is likely to average just $65 in 2010.
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