Oil Price Rally Looks Vulnerable in Spite of Goldman Sachs Assurances

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The world it seems is awash with oil. Apart from the dollar hedge plays going on, buying commodities like oil as the dollar weakens, there is little to keep the price at $75-80/barrel according an article in the Financial Times.

The problem is two fold. First, OPEC’s spare capacity is now more than 5m barrels a day, three times the amount estimated as crude spiked last year. Second, demand for diesel and other distillates like heating oil is down, so much so that US stockpiles are at their highest in decades and Europe’s surplus is so great traders are booking tankers to store it offshore after running out of inland storage space. CSX the US railway operator said in their quarterly statement they used 18% less fuel in the most recent quarter than the same period a year ago, a metric repeated across the distillates market.

Lower distillates consumption means less need for crude from which it is derived and could translate into lower prices. As JP Morgan is quoted as saying, “while we can justify the (current) rally, we don’t trust it In the US, refineries are running at just 80% of capacity and reports suggest this could drop further in the fourth quarter.

Meanwhile some oil analysts would have us see it another way. Deutsche Bank says a steadily weakening dollar will support the crude price and is forecasting prices remain at $75 in the first quarter of 2010. Goldman Sachs, who it should not be forgotten is probably Wall Street’s largest oil trader, predicts $85/barrel by early next year and $95/barrel by December 2010, saying the market is “poised for a breakout. Long in oil are we chaps?

In the medium to long term, demand in Asia is going to outstrip the decline in the OECD countries as an International Energy Agency report covered by Reuters predicts. But while exports remain so weak in China and the rest of Asia is only gradually recovering the short term outlook is not so bullish. It will be interesting to see how the oil price behaves over the coming quarters, fuel surcharges should certainly be subdued though regardless of what transport providers tell us.

–Stuart Burns

Comment (1)

  1. a says:

    i wonder how much oil, steel, copper, etc. china had to consume to erect this empty city?

    http://www.youtube.com/watch?v=0h7V3Twb-Qk&feature=player_embedded

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