The IEA is unlikely to to revise its demand forecast downwards again when it publishes its monthly oil market report tomorrow. This is after nine months of consecutive downgrades. As Nauman Barakat at Macquarie Futures points out, the next step may be an increased demand:
“Leaving demand unchanged is supportive enough because it would tell us that the haemorrhaging has finally stopped but if the agency were to actually revise demand up, it will set this market on fire.”
However demand forecasts remain fairly dismal. On top of that, storage is at a 19-year high – not counting all those tankers. Even The Oil Drum is pointing out there’s a lot of oil around right now. So why is the price rising?
The prevailing view, particularly in recent days, is that the price increases reflect sentiment about the general economic outlook and factors such as the weak dollar and investor appetite, and is less connected to oil market fundamentals. There is a bullish argument on demand from China, which yesterday revealed a large increase in raw materials imports. The price surge has taken investors by surprise and our market report today notes that raw materials, including oil, are in surplus.
Morgan Downey, oil trader and author, called oil at $60 earlier this year and says the bearish view comes in part from over-emphasis on US demand. “The risk toward lower prices is now almost solely from OPEC and not demand,” he wrote on his blog. He also argues that the rise to almost $150 last year was supported by fundamentals, not speculation, because an unprecedented lack of spare oil production capacity set in between September 2005 and July 2008.
The role of speculation in oil price movements is of course highly controversial. Yesterday we ran a piece about John Kemp, another analyst-commentator, arguing that several recent market events showed commodity markets can be substantially manipulated.
Commodities climb on weaker US dollar (FT, 13/05/09)