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Global Oil Market Report Q1 2011: Regaining Momentum
Business Monitor International, Dec 2010, Pages: 21
Regaining Momentum
Q310 Oil Market Review
As with Q2, the third quarter started with encouraging oil market strength, which then dissipated rapidly.
If anything, oil market fundamentals improved, with demand assumptions rising. The US driving season was disappointing, but the real damage was done as macroeconomic uncertainty crept back into the market and investors turned their backs on oil. Ongoing eurozone economic woes, fresh China jitters and a general sense of macroeconomic fragility meant that oil prices were dragged lower with equities and currencies. We remained convinced that there would be a belated rally, as the world heads towards winter in a higher-demand quarter. Thus far, our confidence has been rewarded by a recovery that began in September and accelerated into October.
Demand projections for 2010 continued to firm up during the third quarter, with some upgrades coming through for 2011, even though the jury is out regarding the strength and sustainability of the economic recovery. After rising steadily in the first half of the year, OPEC volumes appear to have levelled out in Q3. The organisation has done and said little to change the supply/demand landscape, although some members at the October 14 ministerial gathering were arguing the case for a US$100/bbl target to compensate for the weakening of the US dollar that is undermining their revenues.
According to the International Energy Agency (IEA) in its October 2010 monthly Oil Market Report (OMR), OECD end-August commercial oil inventories stood at 2,790mn bbl, their highest level since August 1998.
However, a very significant fall looks to have been recorded in September-a period when a small stock rise is the norm. With demand having strengthened and supply having stalled, a continuation of this inventory trend could support an oil price recovery throughout Q4.
September saw global oil supply fall by some 150,000 barrels per day (b/d), according to the IEA. Non-OPEC producers saw volumes fall during the month, while a modest increase in OPEC production failed to compensate.
Crude oil supply from OPEC averaged 29.3mn b/d in September (IEA estimate), up 40,000b/d on the previous month. Much of this increase, however, reflects Iraqi output gains, with the 11 core members actually reducing supply by some 150,000b/d. Quota compliance of around 54% is a definite improvement on the year’s low of around 50%, even if well short of the 59% historical OPEC ‘norm’.
Non-OPEC supply in September fell by just 20,000b/d, with the US hurricane season doing little to disrupt output. During the third quarter, non-OPEC supply was fairly stable when compared with Q2-and not significantly above the Q1 level. Output of around 52.6mn b/d in Q3 compares with 52.7mn b/d in Q2 and 52.3mn b/d in the opening quarter of the year. September volumes are put at 52.4mn b/d.
Given positive demand-side developments, a capping of recent supply growth and some evidence of a fall in stock levels, it is hardly surprising that the end of Q3 saw oil prices gain ground. At the time of our July 2010 quarterly oil price report, the OPEC basket was just below US$73/bbl. It reached almost US$79/bbl in early August, before collapsing to less than US$70/bbl later in the month. September then saw a steady increase from around US$72/bbl to US$77/bbl, with momentum being retained into early October and the OPEC price reaching US$80/bbl by the time this report was written.
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