The bulls are out in force in the oil market. Having slumped by 78% from last summer’s record price of $147 a barrel to $32 in December, the price in New York has since gained around 40% to $47. Options traders are pencilling in $50 within the next two months; Johannes Benigni of JCB Energy sees scope for further gains of 10%- 15%, even if oil cartel Opec doesn’t cut production further at its 15 March meeting.
Opec provides enough oil to satisfy around a third of global consumption. But production has been falling away rapidly, mopping up spare supplies. Opec-11 (which excludes Iraq) has agreed to cut production by 4.2 million barrels per day, and the latest figures suggest that 88% of the cuts have been achieved – a “better-than-usual” compliance rate, notes Deutsche Bank. Overall, Opec has cut supply by 13% since September, according to PVM Oil Associates. Meanwhile, there have been tentative signs of stabilisation on the demand side. After rising by 17% between October and January, US crude stockpiles have levelled off, says Bloomberg.com, and actually fell in the last week of February. American demand for petrol is up 2.2% year-on-year.
Still, it’s too early to sound the all-clear. The global economy is set to shrink for the first time since the war. America has fallen off a cliff, as Warren Buffett puts it – the latest grim news is a jump in US unemployment to a 26-year high, while the rising savings ratio points to consumers cutting back. So a durable recovery in demand looks far off.
China’s economy has weakened and now that its strategic storage tanks have been filled, near-term demand is set to slip further, says Julian Lee of the Centre for Global Energy Studies. It’s likely that Opec will have to do more to boost prices. Deutsche Bank notes the cartel pushed through bigger production cuts in 1998 and 2001, when demand destruction wasn’t as bad as it is now; the fall in demand is the worst since the early 1980s. “While economic data continue to deteriorate, it is unlikely that the oil market will gain any traction,” says Standard Chartered bank. Deutsche still expects an average price for New York oil of $40 in the fourth quarter, while Saxo Bank reckons that, with global demand still ailing, oil could slide to $25 this year.