There’s been no shortage of commentators and analysts pointing out that oil prices have been unjustifiably high for the past few months. While oil and refined products in storage are at record levels in many parts of the world, and signs of economic recovery have been mild at best, the doubling from about $30 per barrel early this year to almost $80 doesn’t reflect the fundamental nature of the oil market, many said.
The IEA however is now of a view (with the likes of Goldman Sachs) that these relatively high oil prices may be justified after all.
The reasons? Partly it’s Opec quota reductions, which briefly reached an unusually high level of compliance in the first quarter. Partly, it’s the much-feared decline of investment in production, which has apparently been exacerbated by the fact that contractor prices didn’t fall as much as many oil companies had hoped. In today’s monthly oil market update, the IEA writes (our emphasis):
Non‐OPEC supply and OPEC NGL have risen marginally since mid‐2008, but OPEC production curbs at their height took around 3 mb/d off the market (although leakage has been evident since 1Q09). So, the crude market ‘surplus’ (as distinct from middle distillates) was largely a hangover from last year’s economic collapse, since when upstream supply has broadly matched demand. Meanwhile, concerns persist about the adequacy of upstream spending and capacity ahead of potential demand rebound, while project costs have remained stubbornly high. So the sub‐$40/bbl prices seen at the turn of the year were, purely from a crude perspective, likely to prove short‐lived. Add in a heady brew of loose monetary policy, surging equities and a weaker dollar, plus a belated arrival of the season’s first Atlantic hurricane to threaten oil infrastructure, and today’s crude prices may not be as disconnected as first appears.
But don’t mistake them for feeling a Goldman-like exuberance about the whole matter:
Of course, if upward price momentum persists, this risks endangering economic recovery. But equally, if economic prognoses are too optimistic, or the winter stays mild, market sentiment could easily weaken once again.
The IEA however says the interaction of fundamental and financial flows remains unclear. It agrees with many commentators that new data published by the US commodities regulator, the CFTC, provides little support for theories that the speculators are pushing up prices. Attention is now turning to the far more opaque over-the-counter commodities contract markets.
Oh – and, to top it all off, demand growth is back.