Crude oil consolidation at $85-90 ?

In the past five months, crude oil prices, unlike that of other industrial commodities, traded in the range of $75-85 per barrel. While there have been recurrent upward revisions to demand estimates for 2010 by several market bodies like International Energy Agency (TEA) and Organisation of Petroleum Exporting Countries (OPEC), the current prices near $80 seem to have factored in these assessments.

Moreover inventories in the US, a major consumer, and a leading indicator of the Organisation for Economic Co-operation and Development (OECD) demand, are currently running well above their five-year average.

However, given the influence of the US dollar on the overall market liquidity and commodity prices in the past two years, a move towards $90 is likely if the cap of $85 is overtaken.

The recent run in the prices of crude has come on the back of a pull-back in the US dollar index, a gauge of the dollar's strength against a basket of currencies, while the sentiment build-up towards the latest meet of OPEC accountable for nearly 40% of the world supply to decide the production quota for the members of the cartel also provided a boost This caused international prices to gain more than 4% from end-February.

OPEC, in its recent periodic meet decided to keep the production quota of its member-countries unchanged. However, the cartel also expressed its concerns over the possibility of abundant supply affecting recovery in demand in' 10. Recently, the oil cartel expressed caution, as it said that the group is ready to use policy tools to promote recovery and price stability.

The demand from OECD countries saw an average decline of 1.5% for the six quarters starting from 'OS and there was a bounce back by a similar average of 1.7% to 46 million barrels per day (mbpd) in the last twoquartersof'09.

On the other hand, the demand from non-OECD countries, including develop ignore merging economies, increased and an average of 1% per quarter between the start of'08 and till the first half of'09. However, the past two quarters saw a flat growth. This demand could see a further pick-up due to rising imports by China, the biggest contributor to the non-OECD demand. As can be seen from the second chart the YoY change in Chinese imports has gained a pace since September '09, and particularly, in the first two months of' 10.

While growing demand in the US looks encouraging, inventories have again started to build up. The year-on-year change total oil demand has started to inch up the negative gap. However, weekly inventories of crude oil have moved further up from its five-year average. Since May '09, inventories were on a declining trend to fill up the gap from their five-year average.

However, since early February '10, they have again started to move away from this average, indicating price constrain on the high reside. In condusion a resistance near $85 curtails the recent run in prices, since positive fundamentals in terms of demand recovery are factored in. However, given the recent reactions from market participants to any positive news and the strong negative correlation of prices with the dollar index (of the order of 80%), a breach of this resistance could cause further consolidation in the $85-90 range.
Economic Times, New Delhi, March 22, 2010