News Analysis: Demand concern cools off oil

• Source: xinhua
• [09:41 April 22 2009]
• Comments

By Yang Lei

Oil prices seem to have lost steam: crude futures tumbled 8.8 percent in New York on Monday, marking the biggest one-day drop since March 2; and the 45.88-US-dollar settlement price hit a new low in more than a month. On Tuesday crude oil edged up just above 46 dollars despite a strong rally in the equity market.

The sharp decline didn't come as a surprise though. As the enthusiasm from an unsustainable stock rally gradually faded away, oil market investors were drawn back to the reality of austere economic conditions and a bleak oil demand outlook.

Oil's Monday drop was largely pushed by a strengthened dollar and the warning of a slow recovery of world economy. The dollar hit a one-month high against a basket of currencies, which limited the appeal of crude futures as a hedge against inflation.

IMF Managing Director Dominique Strauss-Kahn said that the agency will cut global economic forecasts for this year. Last month, the IMF projected a negative growth of between 0.5 percent and 1 percent in 2009, the first contraction in more than 50 years. Strauss-Kahn also expected a recovery to start in the first half of next year.

Meanwhile, a huge slide in the US equity market dampened investors' sentiment and the May contract's expiring on Tuesday added to the volatility of the price.

Since early March, stimulated by the six-week gaining streak in the stock market, oil prices rallied from around 42 dollars to nearly 55 dollars in choppy sessions. The supply-demand fundamentals, however, did not improve in the mean time.

The short-lived optimism vanished after the International Energy Agency (IEA), US Energy Information Administration (EIA) and OPEC rushed to lower the forecasts of this year's world oil demand. Despite the rising US shares, oil prices fluctuated around 50 dollars a barrel last week, demonstrating a lack of sustained support.

The Paris-based IEA said on April 10 that the world oil demand would fall by 2.4 million barrels to 83.4 million per day this year compared with 2008. The report pointed out that fuel consumption has reached the lowest levels since the early 1980s. The IEA also predicted that the world economy and oil demand won't recover until 2010.

A few days later, the EIA lowered its forecast for this year's world oil demand to 84.09 million barrels per day, 180,000 barrels per day fewer than its prior March estimate. And the OPEC also cut further its estimate of this year's oil demand by another 260,000 barrels per day.

There is no sign of revival in the oil consumption in the United States, the world's largest oil consumer. The latest data from the EIA showed that US crude oil inventories reached 366.7 million barrels, the highest level since Sept. 7, 1990. And during the four weeks ending April 10, average fuel demand is 5.2 percent down from one year ago.

Many analysts believe that oil price will remain weak through the summer, the traditional driving season when gasoline consumption peaks in the year.

A research report from Goldman Sachs predicted that the oil price will drop to 45 dollars a barrel shortly. BNP Paribas sees US light crude oil futures down to average just 35 dollars a barrel in the second quarter of 2009, before recovering to 45 dollars in the third quarter and 58 dollars in the fourth.