Commodities | May 02 2008
By Chris Shaw
Commonwealth Bank’s commodity strategist David Moore has been waiting for a pullback in oil prices for some time, but recent weakness not withstanding he is yet to see the price action he has been expecting as evidence points to a tighter than expected market. With this in mind he has updated investors with what are likely to be the key signposts investors can focus on to assess where the oil price is headed.
One such key in Moore’s view is the trend in non-OPEC production, which was forecast to show signs of improvement and so ease the supply side constraints this year. So far in 2008 though the expected increase in output from Russia has to date failed to materialise and other non-OPEC supply has also disappointed.
Another major signpost comes from the demand side, with Moore pointing out expectations for US demand continue to be used as a basis for assessing overall demand strength given it remains the world’s largest consumer of oil. As a result he suggests the market may now be factoring in an eventual lift in demand given the expectation is for a pick up in the US economy later this year.
The actual trend in oil stocks is also an important indicator for oil prices, particularly as Moore notes in recent months there have been a large number of disruptions to output. Such disruptions are now likely being priced into the market as well in Moore’s view and this has helped keep prices higher than may otherwise have been the case.
A final indicator Moore sees as useful is the level of the US dollar, as its fluctuations are contributing to the volatility in commodity markets generally and the oil market in particular. The outlook continues to be for the US dollar to strengthen over the second half of this year, which he suggests should help temper oil prices in the December half.
In conclusion Moore still expects oil prices to ease through the year but the indicators mentioned here suggest price risk in the market remains to the upside, particularly as the continued strength in prices of late suggests the oil market remains quite tight.