Oil is going to be the most important commodity to track this year, as it has been for the past two years.
The impact of the global recession and production cuts from OPEC and allied producer countries will meet in the oil marke3t. All other commodity prices will feed off it in one way or another.
At the moment, oil prices are not providing an accurate picture.
Last Friday, New York prices rose $US1.11, or just over 3% to $US to $US36.51.
Prices for oil delivered in the later months of this year are higher than the current month, and have been for the best part of three to four months.
The February Nymex contract, which expires tomorrow night (January 20) is trading at a $US6.06 discount to the March contract, down from $US8.14 on Thursday.
Based on the curr3ent month’s price, oil futures in New York fell 11% last week and are down 60% from a year ago.
(There will be no floor trading in New York tonight (our time) because of the Martin Luther King Day holiday. The trading will be electronically).
But the current price of oil for delivery next December is 58% higher than January contract (the front-month contract): this called contango. (The reverse is backwardation).
This is coming partly from industry and speculative expectations of rising demand for oil later in the year, on top of narrowing availability.
But there is another driver. The New York price is at a substantial discount to the London price, where the other major global market, the ICE, is located and the main indicator crude is Brent. (The indicator crude in New York is WTI or West Texas Intermediate).
Brent crude oil for March settlement fell $US1.11, or 2.3% on Friday to $46.57 a barrel on London’s ICE Futures Europe exchange. That was a premium of $US10.06 a barrel.
On Thursday Brent crude, at one point traded at a record premium of $US11.56 a barrel over the WTI contract, with the US benchmark coming under pressure after crude stocks climbed to record levels at Cushing, Oklahoma, the key hub of America’s oil pipeline network
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Crude oil stocks at Cushing, the delivery point for WTI, reached a record 33 million barrels, which reflects the extent of the slump in US demand and the reluctance of buyers to exit the market: they are hanging on, hoping for a price spike.
Local supply, demand and inventories in Cushing, have a larger direct impact at the moment on WTI prices, than price signals from global markets.
Crude-oil stocks at Cushing rose 2.5% last week to that 33 million barrel level, the highest since 2004 when records started being kept.
So the price signals coming from Nymex and ICE are mixed: the US price is telling us that stocks are rising as demand plunges and even ploys by big oil groups to hold more and more oil for delivery at higher prices later in the year, is starting to look silly.
The US market seems to be telling us there’s too much oil around and production needs to fall further before a balance can be achieved?
Or is the London price a better indicator, influenced as it has been by the worries about fighting in Gaza (which may have ended) and the Russia-European gas impasse (which now seems to be resolved)?
The London Brent price might start moving down to the US level now that those two extra factors have eased: in that case the lower level of prices on Nymex would seem to be more accurate.
But what will happen to demand this year? Will it rise, as some speculators and big oil companies storing oil on huge tankers, seem to believe?
Well, not if the respected International Energy Agency is concerned.
The International Energy Agency said last week that global oil demand will fall for a second year in 2009, the first back-to-back drop since 1983.
The IEA cut its 2009 forecast by 1 million barrels a day on expectations the economic slump will worsen in coming months in major economies and in China.
The agency estimates consumption will shrink by 0.6% to 85.3 million barrels a day.
OPEC, the US Energy Department and Deutsche Bank have already said demand will fall this year.
The IEA said global demand fell last year and will drop again this year. That represents a major change as the IEA had, until now, maintained that consumption would edge higher this year.
However, the agency said Friday that oil consumption fell by 300,000 barrels a day (b/d) last year and will fall by another 500,000 b/d this year. The IEA said its cut tried to reflect the worsening trends evident since mid-December.
Overall, the Agency dropped its forecast for oil demand this year by 1m b/d, leaving it at 85.3m b/d.
”Forecast global oil demand has been sharply revised down for 2009, following a reassessment of global economic prospects,” the agency said in its latest monthly outlook.
”Global GDP growth has been roughly halved to 1.2 per cent, given the worsening outlook in OECD and non-OECD countries alike,” it added.
The IEA had previously said that oil demand would rise this year, supported by resilient economic growth in emerging countries, particularly in China.
However, it now forecasts that oil consumption growth in 2009 in China will rise by only 89,000 b/d, the smallest rise since 2001. It saw the Chinese economy as losing momentum. We will learn more about China’s economic health this week with the release of some major 2008 figures.
”The expected two-year contraction in oil demand would be the first since 1982 and 1983,” the agency added in its monthly oil market report.
“Highlighting the weak sta
