2009 Oil Outlook

By Jane Foley, Research Director, FOREX.com UK

Hopes of rising demand underpin prices

As a whole, the world economy remains in a weakened state with demand for commodities undermined by the continuation of recessionary conditions in many major economies. That said, better than expected US non-farm payrolls data for July gave fresh appeal to the view that the US economy may return to growth by the final quarter of this year and better than expected Q2 GDP data for Germany and France has also lifted optimism. Several Asian countries including China and S. Korea, both of which have significant industrial bases, also announced better than expected GDP data for Q2. (In 2007 China and S.Korea were the second and eleventh largest oil consumers respectively). This was bullish news for commodities prices as has been the news that oil imports to China surged by 42% to 4.62 mln b/d in July. However, with respect to Germany, China and S.Korea, domestic expansionary fiscal and monetary policies were instrumental in supporting growth in the second quarter. Going forward increased demand in major export markets will be needed to ensure sustainability of high growth rates. A return to growth in the world?s largest economy thus remains the key bellwether for global economic activity and a prime driver of commodity demand going forward.

Brent futures are currently trading over 60% above the February trough. The strengthening in economic activity in Asia was key to the turnaround in price during the spring. The anticipation of stronger demand from the US has been a more recent development. There is, however, a significant caveat associated with this. Better expectations for US growth have simultaneously raised the prospect of a stronger USD. The USD is governed by a complex set of drivers including bearish factors such as the huge fiscal deficit and a (improved) current account deficit. This suggests there are no guarantees of a stronger USD when the US economy improves. The robust inverse relationship between the value of the USD and USD denominated commodities means that higher growth in the US and increased demand for commodities may not translate to a rise in oil prices if growth also drives the value of the USD higher. Given its implications for commodities prices, a strong USD is favoured by all oil importers. A significant increase in oil prices could stifle economic recovery and demand in many emerging markets.

Prices of USD denominated commodities have an inverse relationship with the USD


While global economic recovery may prove to be a rocky path, it seems very likely that global demand for commodities will strengthen into 2010. The IEA last week increased its estimates for oil demand in 2009 and 2010 estimating that the world will need an average of 85.25 mln b/d of oil. On the supply side the IEA estimated that non-OPEC supply rose in July and it foresees that stronger than expected Russian output will lead to an upwardly revised projection of 51 mb/d in 2009 and 51.4 mb/d in 2010. OPEC oil would meet the remaining demand. In July 2009 OPEC is estimated to have produced 28.7 mb/d.

Clearly inventories measure the buffer between supply and demand. Low levels of inventories can increase volatility in oil prices though this not the case at present. By the end of July US inventories were above the upper boundary of the average range for this time of year and this trend has been continued into August. While a third consecutive rise in US oil stockpiles has undermined oil prices hopes of a recovery in global demand could see Brent ticking back above $75.00 going into September.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency or metal. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.