Despite higher prices, supply and demand data is still lacklustre
By Goh Eng Yeow 8 June 2009
While traders debate the sustainability of the current stock market rally, another potentially key indicator of economic rejuvenation - the crude oil market - is quietly on the march.
In the past month alone, crude oil prices have surged by 28 per cent to nearly US$70 (S$101) a barrel.
The last time oil prices hit this level on its way up was in 2007, when the global economy was prospering and there was barely a financial storm cloud on the horizon.
Oil-thirsty countries such as China were booming on the back of strong exports, while global stock markets were on a sustained upswing.
In Singapore, it was a bonanza for leading global rig-builders such as Keppel Corp and SembCorp Marine as they won billions of dollars in orders from firms eager to produce more of the black gold.
The sharp gains in oil prices this time around have been interpreted by some traders as a sign that the global economy is on the mend.
The theory is that as wider economic activity picks up, the demand for oil will grow in tandem.
But the actual consumption of oil worldwide does not seem to support such an argument.
Although some economies such as China have seen a slight rise in demand for crude oil, consumption in the world’s biggest economy - the United States - has actually fallen. It hit a 10-year low of about 900,000 barrels a day last week.
Together with the lacklustre demand from recession-hit Europe, some oil analysts are predicting that global crude oil consumption might fall by up to 2.6 million barrels a day to 83.2 million barrels this year.
The supply-side data for oil is also hardly encouraging. There is talk that as much as 100 million barrels worth of crude oil and oil products could be floating at sea in tankers because of a lack of storage space.
So just looking at the supply and demand data alone, there seem to be few reasons for a robust oil price.
This arouses suspicions that speculators could be up to their old tricks again. The suggestion is that some funds may be rotating money out of equities into crude oil, after making a tidy pile on the stock market.
After all, massive speculation in the futures market caused crude oil to surge to a record high of US$147 a barrel in July last year, before collapsing to US$36 in February, as fears of a massive global economic slowdown took hold.
And the timing by these speculators could not have been more fortuitous. Investors are beginning to fret about the inflationary pressure triggered by the US Federal Reserve’s attempt to jump-start the stalled US economy by printing enormous sums of money.
Since late February, when the Fed started its so-called ‘quantitative easing’ by buying billions of dollars of bonds on the open market, the US dollar has been weakening against other asset classes such as oil and less inflation-prone currencies such as the euro.
Indeed, there is an almost perfect correlation: Oil and the euro are both trading in opposite direction to the US dollar - as concerns mount over the potential build-up of inflation as the US government sank into massive debts to try to jump-start its troubled economy.
Then there are the usual reasons which traders give for a rally on oil prices around this time of the year.
It will soon be hurricane season in the southern United States and this is stirring fears that, as in previous years, some refineries may find their operations disrupted by the severe tropical storms.
Then there is the anticipated jump in demand for petrol, as the summer holiday season in the US and Europe reaches its peak in the coming months.
Together, these reasons seem to point to the likelihood of even higher crude oil prices in the months ahead - even though the lacklustre supply and demand data may paint a very different picture.
Any further spike in oil prices will raise fear that the global economy may be headed for stagflation - a deadly mix of high inflation and economic stagnation.
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Oil price rise not sign of recovery
Despite higher prices, supply and demand data is still lacklustre
By Goh Eng Yeow
8 June 2009
While traders debate the sustainability of the current stock market rally, another potentially key indicator of economic rejuvenation - the crude oil market - is quietly on the march.
In the past month alone, crude oil prices have surged by 28 per cent to nearly US$70 (S$101) a barrel.
The last time oil prices hit this level on its way up was in 2007, when the global economy was prospering and there was barely a financial storm cloud on the horizon.
Oil-thirsty countries such as China were booming on the back of strong exports, while global stock markets were on a sustained upswing.
In Singapore, it was a bonanza for leading global rig-builders such as Keppel Corp and SembCorp Marine as they won billions of dollars in orders from firms eager to produce more of the black gold.
The sharp gains in oil prices this time around have been interpreted by some traders as a sign that the global economy is on the mend.
The theory is that as wider economic activity picks up, the demand for oil will grow in tandem.
But the actual consumption of oil worldwide does not seem to support such an argument.
Although some economies such as China have seen a slight rise in demand for crude oil, consumption in the world’s biggest economy - the United States - has actually fallen. It hit a 10-year low of about 900,000 barrels a day last week.
Together with the lacklustre demand from recession-hit Europe, some oil analysts are predicting that global crude oil consumption might fall by up to 2.6 million barrels a day to 83.2 million barrels this year.
The supply-side data for oil is also hardly encouraging. There is talk that as much as 100 million barrels worth of crude oil and oil products could be floating at sea in tankers because of a lack of storage space.
So just looking at the supply and demand data alone, there seem to be few reasons for a robust oil price.
This arouses suspicions that speculators could be up to their old tricks again. The suggestion is that some funds may be rotating money out of equities into crude oil, after making a tidy pile on the stock market.
After all, massive speculation in the futures market caused crude oil to surge to a record high of US$147 a barrel in July last year, before collapsing to US$36 in February, as fears of a massive global economic slowdown took hold.
And the timing by these speculators could not have been more fortuitous. Investors are beginning to fret about the inflationary pressure triggered by the US Federal Reserve’s attempt to jump-start the stalled US economy by printing enormous sums of money.
Since late February, when the Fed started its so-called ‘quantitative easing’ by buying billions of dollars of bonds on the open market, the US dollar has been weakening against other asset classes such as oil and less inflation-prone currencies such as the euro.
Indeed, there is an almost perfect correlation: Oil and the euro are both trading in opposite direction to the US dollar - as concerns mount over the potential build-up of inflation as the US government sank into massive debts to try to jump-start its troubled economy.
Then there are the usual reasons which traders give for a rally on oil prices around this time of the year.
It will soon be hurricane season in the southern United States and this is stirring fears that, as in previous years, some refineries may find their operations disrupted by the severe tropical storms.
Then there is the anticipated jump in demand for petrol, as the summer holiday season in the US and Europe reaches its peak in the coming months.
Together, these reasons seem to point to the likelihood of even higher crude oil prices in the months ahead - even though the lacklustre supply and demand data may paint a very different picture.
Any further spike in oil prices will raise fear that the global economy may be headed for stagflation - a deadly mix of high inflation and economic stagnation.
We may be headed for more bumpy days ahead.
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