Commodities | Sep 10 2007
By Chris Shaw
After labour figures released in the US last Friday night came out weaker than expected there are increasing concerns for the health of the US economy, which has implications for the health of other markets around the globe and oil is no exception.
As Commonwealth Bank commodity strategist Tobin Gorey notes the uncertainty in global markets as to how the US will come through the current credit crisis is driving sentiment in all markets, so any negative shock is likely to see the oil prices move lower, notwithstanding supportive factors such as the potential for supply disruptions from hurricane season in the Gulf of Mexico.
The possibility of a recession in the US economy is one such potential negative shock in the making given last week’s labour market figures and this is important for oil market sentiment as Gorey points out the US economy needs to grow at around 2.5% in 2007 for its level of oil demand to remain unchanged.
Such growth appears unlikely, but fortunately for those playing the oil market this slowing in the US is being offset by stronger demand from China and other regions, mitigating its impact to a large degree.
This means if the US issues fade from the list of most important market issues investor attention should again return to the market’s fundamentals based on a more global rather than US-centred perspective and here he sees the outlook as supportive for prices moving higher.
Danske Bank agrees the outlook favours prices moving higher given a number of factors are likely to prove supportive, including ongoing strong demand globally, continued geopolitical tensions and indications OPEC is aiming for higher prices.
The bank draws this last conclusion from the fact there is little likelihood of this week’s OPEC meeting resulting in an increase in output, even though currently production is short of demand and this is bringing down inventory levels.
If OPEC chooses not to increase production it won’t please the International Energy Agency (IEA), as they have called for more oil to be produced and estimates if OPEC does not lift output there could be a shortfall of two million barrels per day in the fourth quarter of this year.
This should see the oil price push above US$80 per barrel in coming months in the bank’s view, though according to Credit Suisse any price increase is likely to prove short-lived. The broker suggests as only prices at the short-end of the curve have been increasing of late the spread between close and longer-dated expiries is now too wide and so is unlikely to be sustainable.
According to Barclays Capital there is also scope for OPEC to announce its intention to lift output at the upcoming meeting, a move that may allay some fears of the market continuing to tighten and so remove some of the upward pressure on prices.
Against this though it notes the OPEC view remains one of an expectation of higher non-OPEC output, something that may be enough to allow the OPEC ministers to sit on their hands and keep output at current levels.
The lack of any clear consensus on the likely direction of oil prices in coming weeks and months suggests the only virtually assured outcome is further volatility in prices, with sentiment to be driven by both economic data in the US in particular and the actual state of the supply and demand equation in the oil market.