The price of crude oil price in the global markets moved up marginally after hitting a 75-day low on Wednesday. This appears to be more of a technical bounce-back while changes, if any, in fundamentals are on the negative side. Given the scenario of oversupply, it is sentiment and liquidity that will continue to drive crude oil prices globally.
The uptick in oil prices came on the back of US inventory data, which was substantially higher than overall expectations. The country added 4.1 million barrels of crude oil to its already high reserves for the week ended August 20 as demand fell woefully short of supply.
Oil inventories in the industrially advanced OECD countries that International Energy Agency (IEA) tracks have also been rising for long. From 92 days of consumption by end 2009, inventories now make up for 96 days of consumption of these countries — a level witnessed only in the first half of 2009.
Globally, crude oil production has consistently remained ahead of consumption for a long time. OPEC, which sets production quotas considering the world’s requirement of crude oil after reducing the non-OPEC production from total demand, has been investing in adding more production capacity and hence has been unable to restrain its member countries in maintaining production levels.
According to OPEC’s data, the group has already overshot its production requirement by an average 220,000 barrels per day in the first half of 2010. Going forward, the production from non-OPEC countries as well as natural gas liquids from OPEC are likely to increase consistently in 2011.
As a result, for the next four quarters OPEC’s production requirement will fall continuously — to a level nearly 1.2 mbpd below what it is producing today.
The demand forecasts for crude oil continue to hinge on the forecasts of global economic growth. The IEA raised its global oil demand forecast in August to 86.6 mbpd for 2010 and 87.9 mbpd in 2011 based on IMF’s World Economic Outlook Update of July 2010. However, it continues to warn of the significant downside risks a weaker global economic recovery poses.
Lower crude oil prices bode well for the Indian economy as well as oil firms. However, this alone will not be enough to improve the profitability of oil companies considering that refined product prices too remain depressed.
Source: The Economic Times Of India
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