The major US investment banks saw their revenues from commodity trading jump 55% in Q1, as oil and other prices rose. According to the Wall Street Journal, JP Morgan (which employs 1800 people in its commodities unit), made $750m in Q1, well ahead of its $1.2bn target for the whole of 2011.
The driving force behind these bumper profits was the widespread belief that crude oil and other commodities were going tight. Yet as the above slide from Thomson Reuters shows, oil demand is actually falling in both N America (dark blue line) and Europe (yellow). Whilst Asian growth (light blue) is plateauing.
Thus the latest International Energy Agency forecast suggests average 2011 oil demand will only be 89.2mbd, lower than the Q4 2010 rate of 89.4mbd. Equally they report global stocks at comfortable levels of 58.8 days in March, even though this was peak refinery maintenance season.
Similarly in the USA, the valuable Petromatrix report shows inventories remain near record highs. These have grown by 20mb in the past 4 weeks. At the same time, US demand is continuing to fall. It was down nearly 1mbd over the past 4 weeks versus 2010.
Financial investors now have $410bn in commodity-related assets, according to Barclays Capital. This is double the amount at the 2007 pre-crisis peak. But in the end, fundamentals will always prevail. Absent geopolitics or similar, we are probably at a tipping point.
OPEC, and Saudi Arabia in particular, have much to lose from current prices continuing. These support much greater use of renewables, as Saudi Oil Minister Naimi noted last November, and so pose a real threat to the long-term demand for oil on which Saudi's economy depends.
Chemical companies had to buy forward during Q1 in order to preserve margins. But the downside risk is now instensifying, as markets start to price in the demand destruction that these high prices have caused.
UPDATE: OPEC's meeting today failed to agree the Saudi proposal to lift output by 1.5mbd. Naimi described it as "one of the worst meetings we have ever had". Thomson Reuters reports that "Saudi will now raise output unilaterally".