Global Investment House – Monthly Oil Bulletin November 2009- Oil prices hovered around the- US$80 mark as doubts over sustainability of economic recovery took shine off the positive economic data. US GDP grew strongly by 3.5% QoQ on an annualized basis in 3Q-2009. However, more than half of the growth was accounted by car scrappage and incentives for first-time-home-buyer’s scheme. With the expiry of these stimulus measures the US economy is unlikely to witness similar growth in the 4Q-2009. US crude decreased by 2.1% during the review period (20 Oct 09-19 Nov 09) to settle at US$77.46 per barrel mark. On the other side of the Atlantic, the Euro-zone came out of recession with the 16 mainland European economies witnessing a GDP growth of 0.4% in 3Q-2009. Despite these positive numbers, we believe, the direction of oil prices will be determined by the ability of consumer spending and private sector to replace government stimulus as drivers of economic growth. So far it has been a “jobless” recovery with unemployment at historically high level in various countries.
US crude oil prices increased by US$2.00 (2.6%) on 9 November, 2009 as expectations of further devaluation of US$ and threat of Hurricane Ida fuelled bullish sentiment. The G-20 meeting concluded with little mention of the depreciating US$. Major economies, including the US, have indicated their desire to keep the interest rates low for the foreseeable future to facilitate economic recovery which is likely to keep US$ under pressure. A weaker US$ makes it cheaper for foreign investors to buy dollar-denominated commodities. Falling value of US$ was also reflected in gold prices as they reached an all-time high of US$1,145 an ounce on 18th November 2009. Oil prices stayed in the range of US$81.04-76.35 per barrel during the review period (20 Oct 09-19 Nov 09). Oil prices were also supported by rally in major equity markets with Dow Jones breaching the 10,400 mark to reach a 13-month high.
Despite the stimulus measures, the timing and magnitude of recovery remains uncertain which has kept oil prices extremely volatile. Germany and France are one of the first major economies to come out of recession followed by Japan and US while the UK is still mired in economic problems with its GDP declining by 0.4% in 3Q-2009. The recovery process is still fragile as the growth in major economies is coming on the back of massive government spending and low interest rates which can’t last indefinitely. World oil demand growth is being led by the developing countries with China in the forefront. China and Indian economies are expected to continue on the high growth trajectory of 7-9% in 2010.
Daily Price Trend Nov 09/Oct 09
Source: OPEC, EIA, Bloomberg, Global Research
In the first week of the review period US crude oil prices witnessed a decline of 1.9% to US$80.05 per barrel after a rally in the previous week, which saw prices go up by 9.4%. Disappointing industrial sector earnings of companies such as Schlumberger and Broadcom casted a shadow on the pace of economic recovery. Oil prices continued the slide in the second week of the review period with a decline of 3.8% to US$77.0 as US weekly oil inventory data revealed a rise in gasoline stocks. Oil price rose marginally by 0.6% to US$77.43 per barrel in the third week of the review period. Oil prices rose initially due to a decline in crude oil stocks and US Federal Reserve decision to keep interest rates at historically low levels. However, prices receded in the latter part of the week as worse-than-expected US unemployment data dampened optimism. Oil prices declined by 1.4% to US$76.35 per barrel in the fourth week as US inventory report showed a jump in US crude oil stocks. The US crude oil price recovered slightly to US$77.46 per barrel at the end of the review period. OPEC basket and Kuwait export crude price ended slightly up increasing by 1.3% and 1.7% during the review period to settle at US$76.77 and US$76.79 per barrel respectively.
World oil demand is expected to average 84.31mn bpd in 2009, a decline of 1.39mn bpd YoY. The decline in OECD oil demand is expected to outweigh demand growth from Non-OECD countries. However, the important thing to note is that demand has picked up in 2H-2009. The estimate of decline in world oil demand was 1.65mn barrels in July 2009 which has now been revised to a decline of 1.39mn barrels largely due to improved demand from the North American region. The massive stimulus packages announced by major economies have filtered into higher demand for oil in the year 2009 compared to original estimates. According to OPEC the world oil demand is expected to bounce back by 0.75mn bpd in 2010. We believe that this is very much a possibility with the G-20 members indicating their intention to carry on with stimulus measures such as low interest rates well into 2010 to boost economic activity.
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