Friday, May 21, 2010

Bullish and bearish factors behind oil price. Great article!

LONDON: US crude oil prices fell below $65 a barrel this week, hitting the lowest level since July last year, pressured by concerns about the impact
of the European fiscal crisis on fuel demand. Oil, which had recovered to around $70 on Friday, is more than double a low of $32.40 reached in December 2008 but remains less than half the record high of nearly $147.27 hit in July that year.

The following lists the main bullish and bearish factors in the oil markets.

1) Greece has been forced to impose drastic spending cuts after an EU bailout intended to prevent the economic turmoil spreading across Europe with Spain and Portugal seen as the markets' next potential targets. The latest economic crisis has pushed the euro to four-year lows, making oil priced in dollars more expensive for European buyers and raising the prospect of reduced demand.

Lower fuel consumption in Europe would have relatively little impact on the price of oil and other commodities because Asia has long been considered the real driver of increased consumption of raw materials. But analysts have said the extent of the European economic turmoil could have knock-on effects worldwide.

2) Weak demand has coincided with a rise in crude oil stocks in Cushing, Oklahoma in the United States to a record high. Cushing is the delivery point for U.S. crude futures, so inventory levels there have a very direct impact on the international oil price.

Inventories are generally high and in addition to official storage sites, crude oil stocks held in floating storage have risen, mainly because of a build up in Iranian crude after a fall in term contract purchases by some Asian oil companies. OPEC The overhang in overall stocks has been increased by OPEC's declining compliance with output targets. According to a Reuters survey, discipline has slipped to 51 percent.

As oil prices have dipped below $70, there have been murmurings from some members of the producer group about the possibility of an emergency meeting on production curbs if prices fall much further. Leading oil exporter Saudi Arabia has said a $70-$80 price range is fair for both producers and consumers.

Algerian Energy Minister Chakib Khelil said this week, however, OPEC would not have a role to play in controlling falling oil prices as they were being driven by the world economy, not oil supply.

3) The U.S. Commodity Futures Trading Commission aims to rein in speculation in energy and commodity trading, especially oil. Excessive speculation has been blamed for sending food and oil prices to record highs in 2008. Some analysts say that these regulations would only impact the biggest players and therefore not affect oil prices massively, while others say the moves will deter investment, pressuring energy futures prices.

Public comment ended April 26 on the CFTC's plan to limit how many energy contracts hedge funds, investment banks and other speculators can control. Staff will review and consider the recommendations, provide summaries to the CFTC's commissioners and prepare a draft of a final rule. There is no mandated timeframe for the review.

4) China's apparent oil demand grew by double digits for the eighth consecutive month in April as the world's second largest energy user continued
to drive consumption recovery. The implied oil demand, the total amount of crude processed and net imports of refined fuel, grew by nearly 13 percent from a year earlier, according to Reuters calculations based on preliminary official data released on Tuesday.

There was some caution this week about China's economic future after a leading indicator showed that growth may have already peaked in the world's third-largest economy. Many analysts have said overheating, not a hard landing, remains the bigger risk for China.

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