Oil's oversupply versus economy's rebound

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Saturday, 09 May 2009

Oil’s oversupply over economy is bottoming out. This is the critical fight for oil prices as the oil producers managed to overcome the fall of demand through the cut of their daily production. The question for the time being is not how many barrels of oil the world economy can consume per day, but how many oil there is in the market. That’s why some OPEC members blame independent producers during last weeks, and second, explain why oil prices fall every time that U.S Enenrgy Department announces the level of U.S. crude oil inventories.
The story repeated for one more time yesterday. Crude-oil futures fell Tuesday for the first session in five, pulling back from their highest level in more than five months on expectations that U.S. crude inventories have risen from their 19-year high last week.  Analysts surveyed by Platts expect a buildup of 2.2 million barrels. Limiting crude's losses, Federal Reserve Chairman Ben Bernanke said the U.S. economy is bottoming out.
"While economic indicators are continuing to look less bad, oil fundamentals are still looking far from rosy," said Nimit Khamar, an analyst at Sucden Financial Research, in a note. "The fact remains there is still a large amount of crude inventories around and oil demand is continuing to fall."
On the other hand, OPEC oil supply fell in April for an eighth consecutive month due to disruptions to Nigerian output and as members implemented a deal to prop up prices, a Reuters survey showed on Friday.
Supply from the 11 members of the Organization of the Petroleum Exporting Countries bound by output targets declined to 25.52 million barrels per day (bpd) from a revised 25.63 million bpd in March, according to the survey of oil firms, OPEC officials and analysts.
The survey suggests OPEC has made 84 percent of supply cutbacks promised since last year, one of its highest ever rates of adherence. But analysts say weak demand and rising stocks underline the scale of its task in boosting the market.
"OPEC has managed to cut its supply with a relatively high degree of compliance," said Harry Tchilinguirian, oil analyst at BNP Paribas in London.
"Yet it faces a large inventory hurdle, both in volume and in days of demand cover. They will need to stay the course for longer compared to the recessionary periods of 1997-98 or 2001."
Despite OPEC deals to cut supply by 4.2 million bpd since September as prices and demand slid because of the recession, oil stocks have swollen in developed countries and equalled 61.6 days of demand in February, the highest since 1993.
The pledged curbs are equal to about 5 percent of daily world demand. OPEC pumps more than a third of the world's oil.
Supply from OPEC members with output limits, all except Iraq, in April was 680,000 bpd higher than their collective target of 24.84 million bpd, the survey found, meaning OPEC has lowered output by 3.52 million bpd of the promised 4.2 million.