The Crude Oil market does not have any serious demand-supply mismatch. The pledge by OPEC to increase the output to 30 million barrels per day (mbpd), coupled with slowdown in China – the second largest consumer of crude oil in the world, mainly due to the contraction in manufacturing PMI, the drop in industrial production and strengthening of the dollar triggered a correction in crude oil.
The Crude Oil market does not have any serious demand-supply mismatch. The pledge by OPEC to increase the output to 30 million barrels per day (mbpd), coupled with slowdown in China – the second largest consumer of crude oil in the world, mainly due to the contraction in manufacturing PMI, the drop in industrial production and strengthening of the dollar triggered a correction in crude oil.
It corrected from $102/barrel to $93/barrel last week. Again, prices are back at $100/barrel. However, factors other than contraction of demand are having a significant impact on oil prices.
According to Nirmal Bang Commodities, last week crude oil futures surged amid evidence that the demand for crude oil by the US could be growing. The Energy Information Administration recently said that crude inventories had fallen by 10.6 million barrels, the biggest drop ever for that time period and a much larger drop than the decrease of 2.3 million barrels which was forecasted by analysts. Since the last two months we are witnessing a gradual drop in crude oil inventories in the US which are seen lending support to the prices.
The European Union and the US are seeking support from the Middle East and Asia for sanctions to increase pressure on Iran to abandon a suspected nuclear weapons programme. The sanction on Iran may escalate geopolitical tensions, which can push crude oil prices upwards. According to the US Department of Energy, about 15.5 million barrels of oil a day, or a sixth of global consumption, flows through the waterway between Iran and Oman at the mouth of the Persian Gulf and any disruption can send crude oil prices soaring.
Iran put neighbours on notice saying that it was about to conduct a vast naval exercises in the Arabian Sea, including war games near the Strait of Hormuz, a vital shipping lane for international oil traffic. The exercises, to start Saturday (24th Dec. 2011) and last 10 days, are Iran’s first since May 2010 and described by official news media as the largest the country has ever planned. The exercises are bound to put Iranian warships close to vessels of the United States Fifth Fleet, based in Bahrain, which patrols some of the same waters, including the Strait of Hormuz. About one-third of the world’s oil tanker shipments pass through the strait of Hormuz.
Despite the ongoing slowdown in the global economy, fears of geopolitical tension have resulted in $8-10/premium in crude oil prices. Looking at the demand and supply of crude oil, one may not buy it. However, due to the recent developments, a temporary upside in crude oil futures can be expected and it may test $103-104/barrel this week, despite bearish fundamentals.
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