OPEC calls oil prices “beautiful”

OPECright.jpgOPEC’s meeting wrapped up quickly yesterday, with Saudi oil minister Ali al-Naimi once again saying oil prices today were “beautiful“.

This highlights sentiment’s ability to take prices in the opposite direction to fundamentals. For certainly, on fundamentals, OPEC should have had a difficult session:

• Quota compliance is now down at c50%, with Bloomberg estimating OPEC production at 26.8mbd last month, versus the target of 24.9mbd.
• Global oil stocks are 15% above normal levels at c60 days, versus the typical historical level of c52 days.
• OPEC’s own analysis suggests that 2010 is likely to see “a decline in the demand for OPEC oil for the 3rd consecutive year“.

But financial markets remain convinced a strong V-shaped economic recovery is underway. They also believe that China’s oil demand will increase for domestic consumption, in spite of data showing China’s oil imports are increasingly being used as the basis for exporting oil products – which is a zero sum game within the Asian market.

Interestingly, however, blog’s own sentiment indicator, the Boom/Gloom Index, has been stable now for c6 months. And this parallels the oil bulls’ own inability to push prices much above today’s $80/bbl level, in spite of continued talk that they should be nearer $100/bbl.

Will this stability continue? The key issue, perhaps, is now the one of demand destruction. US gasoline prices are at $2.80/gal, their highest level since Q4 2008. And high energy prices also typically reduce consumer’s discretionary spending – which in turn usually lowers chemical and polymer demand.

On a fundamental basis, such a combination of lower demand and high stocks would not normally be a recipe for rising or even stable prices.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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