OIL MARKET REPORT - HIGHLIGHTS

Following are the highlights of the latest oil market report released by the International Energy Agency (dated 18 January 2007):

Crude oil prices fell to 20-month lows in mid-January as lower demand, due to unusually warm weather and fund repositioning in commodity markets, offset the impact of OPEC cuts. Despite a sharp fall in US crude stocks, high inventories at the NYMEX delivery point of Cushing, Oklahoma, are contributing to the persistence of higher forward prices.

Global oil product demand has been cut by 450 kb/d in 4Q06 following large US data revisions, unseasonably mild temperatures, fuel switching and lower apparent demand in the FSU. Some of these factors, together with a lower US GDP assumption, contribute to a reduction in forecast global demand growth to 1.6% in 2007 (85.8 mb/d).

World oil supply rose by 110 kb/d in December to 85.4 mb/d, as strong recent non-OPEC growth continued. However, revisions to Norway, Mexico, Canada and Latin America lowered non-OPEC supply by 0.3 mb/d to 52.3 mb/d in 2007. Mild weather cut the 4Q06 ‘call on OPEC plus stock change’ to 29.4 mb/d, but the 2007 call was lifted by 0.1 mb/d to 28.6 mb/d, only marginally below the average call in 2006.

December OPEC-11 crude supply fell by 155 kb/d to 28.8 mb/d, but persistent disruptions to Iraqi and Nigerian supply limit effective spare capacity to 2.5 mb/d. Indications of further cuts in 1Q OPEC output follow the recent fall in prices and an agreement in Abuja to curb supply by 500 kb/d from February. Angola became an OPEC member from January 2007.

OECD refinery throughputs increased by 1.1 mb/d in November to average 39.1 mb/d. Weekly data suggest a further increase of 0.6 mb/d in December to a winter peak of 39.7 mb/d. Global throughputs are expected to decrease over the course of the first quarter, as maintenance takes place sequentially in the US, Europe, the Middle East and Asia.

OECD total industry oil stocks continued to decline in November, falling by 33 mb as product draws offset a modest crude oil stock build. Provisional data suggest the trend continued in December. While total OECD stocks are 41 mb higher than one year ago at 2,712 mb, forward demand cover fell by one day from October to 54 days.

Oil sees sub-50, still seeking bottom

Continuing its falling spree, oil briefly fell below $50 per barrel this Thursday before recovering slightly on Friday. Crude oil has shed about 18% in 12 sessions of 2007 and the sub-50 level has been seen for the first time in 20 months.

Weeks of mild winter weather in the U.S. Northeast, a key consumer of heating fuels, and growing energy stockpiles amidst doubts on OPEC’s ability to effect production cuts have been driving the recent fall. OPEC has committed itself to a total cut in output of 1.7 million barrels per day, including a 500,000 barrel-a-day reduction set to begin February. But the oil cartel is believed to have cut output by little more than half of its pledged levels. Production remains near 27 million barrels a day or about 700,000 barrels a day above OPEC's target.

OPEC member Saudi Arabia, which is also the world's biggest oil exporter, has been vocal about not making further production cuts and has instead said it plans to increase its crude oil production capacity nearly 40 percent by 2009 and double its refining ability during the next five years to keep pace with growing global demand.

Although crude oil for February delivery at NYMEX managed to close above $50 per barrel, it's expected to keep its date with sub-50 level. It should trade in a $40-50 band in the near future - a level where most of the consumers, notably developing economies like India, will be comfortable.

OIL – ALL’S NOT WELL

The southward movement of oil prices continues. NYMEX crude slipped last week below $52 a barrel before rebounding to $53 on Friday. While mild weather has been the prime driver in the recent downward movement, future direction will depend on a host of forces, including the stance OPEC is going to take (also the OPEC’s capacity to deliver production cuts and influence prices - OPEC's credibility has been on the wane), hedge fund speculators (a number of funds are taking short positions, on bets that prices will fall) and the strength of the global economy (which will affect the demand going ahead). Also on the market’s radar will be the geo-political developments especially in the middle east, though worst of the fears are already discounted.

The prices are expected to go below $50 very soon. Some analysts are even predicting the drop to extend to $40 a barrel, a price not seen since 2004. Crude oil has been in an eight-year bull market until last summer’s high above $78 a barrel. In 1998, oil traded as low as $10.35.

Oil Prices South-Bound

First week of the New Year marked the sharpest fall in two years for crude oil prices – a weekly loss of about 8%. The fall comes amidst continued mild weather in the north-east coast of the US and ample supplies of petroleum products. On Friday, the prices recovered slightly, helped by a better-than-expected US jobs report for December. US light crude oil settled 72 cents up at $56.31 a barrel in New York and London's Brent crude rising 53 cents to $55.64. The overall sentiment, however, looks to be bearish.

The crude prices have been falling despite two production cuts agreed on by OPEC members - 1.2 million barrels a day in November and 0.5 million barrels per day beginning February next. The continued price fall reflects the market belief that members of the oil cartel are not adhering to the agreed production cuts.

While weather has been a key driver of sentiments in recent weeks, the drop in oil prices is accompanied by a simultaneous drop in other commodities as well. With global outlook for commodities being not-so-bullish, significant shifts in asset allocation of investors is expected in the year ahead. This may mark a halt in the bull run in commodities. The informal 'floor' price for crude oil that OPEC wants to defend - understood to be $60 a barrel - has been convincingly breached and next few weeks may even take the price below $50, as little support is seen forthcoming at current levels.

Is OPEC ready for further cut?

Oil prices have risen in the recent weeks, amidst growing uncertainty and speculation on deeper production cuts from OPEC. The oil producers’ cartel which controls about 40 percent of the world's oil production is worried about a surplus of global crude-oil inventories and has been trying to stem the fall in prices after they fell from a peak of $78.40 a barrel in July to below $60 in October. According to latest estimates, the US has inventories of 340 million barrels, 14% more than average. Similarly, stocks held among the 30 OECD members stood at 2.76 billion barrels at September end, the highest level in almost eight years and 4.5 percent higher than a year ago.

The production cut of 1.2 million barrels a day agreed by the OPEC members in October has helped a rebound, although there were doubts about the actual cuts when the decision was announced. Crude prices have now come back to well above $60 a barrel.

And, now another cut is being contemplated by OPEC. OPEC President and Nigeria's oil minister Edmund Daukoru has been quoted as saying that he's “not comfortable” with current prices and is in favor of a further trimming in production. OPEC oil ministers are to meet next week in Nigeria. Will they deliver further cuts? While many members support deeper cuts, some believe that the current price levels are acceptable and can be maintained without further cuts.

Related post:

Of opaque flows, cuts and prices http://aktonmarkets.blogspot.com/2006/10/of-opaque-flows-cuts-and-prices-oil.html

Of opaque flows, cuts and prices

Oil prices have continued to fall, despite a decision by OPEC to cut production by 1.2 million barrels per day (bpd). The targeted production cut is 200,000 bpd more than what was expected. The oil cartel's decision to cut production shows their discomfort with the continued fall in crude oil prices and their anxiety to defend a floor price which is seen somewhere near $60 a barrel. Oil prices have fallen about 25 percent from the record mid-July level of $78.40 a barrel to below $60 now.

There are, however, doubts in the market whether OPEC members will be able to deliver the targeted reduction. The talk of a 1 million bpd cut has been doing rounds for about a month and was already factored in. So, when the OPEC ministers met in an emergency meeting in Doha, they decided to give a strong signal to the market by announcing a larger reduction target and hinting at the possibility of further cuts when they meet again in Nigeria in December.

OPEC members supply about a third of the world's crude and are concerned about high fuel stocks in consumer countries, particularly in the US, and a projected drop in demand for OPEC oil in 2007 as competitors bring in more supplies. The decision to cut the production is described by OPEC as aimed at restoring the ‘equilibrium’ between supply and demand, which has been distorted by ‘over-supply’ and huge inventory levels. The skepticism on the member countries’ ability to deliver the agreed reductions has come from the deep divisions seen within the cartel on how to implement the cuts. The targeted reduction comes at a cost for the member countries, particularly for those who have heavily invested their petrodollars into building up their oil sectors.

Market movements in the coming weeks will show whether OPEC will be able to define the current price level as the floor for the medium term. A large section of the market believes that there may not be any rise in the prices in near future and the current declining trend may continue, given the large existing inventories and the uncertainty surrounding the production cuts. According to a Bloomberg News survey conducted just before OPEC announced its decision, prices may fall next week on doubts the producer group will cut production enough to reduce excess supplies. 21 of 49 analysts, traders and brokers covered in the survey said prices will decline, 14 forecast an increase and 14 predicted little change.