US oil stocks rise, demand drops, prices rise

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Oil prices have been rising steadily over the past few weeks, and are up 20% since the start of the year. Yet US oil inventories have also been rising, and are now at their highest level since July 1993. Stocks have risen in 22 of the last 26 weeks.

Whilst OPEC production cuts have certainly helped to stabilise the market, demand is continuing to fall, and is now down 3.2% from 2008 levels. In response, Total is taking the extreme measure of temporarily shutting its 240 kpd Port Arthur refinery.

The rationale for the disconnect between weak oil market fundamentals, and higher prices, lies in financial market sentiment. Traders continue to believe, as they have all year, that demand is just about to recover. A clear sign of this is the forward premium in futures markets, where the March 2010 WTI futures contract is $10/bbl above today’s high price.

Sentiment can, and often does, take prices out of line with the fundamentals – on both the upside and downside. But in the end, fundamentals will again set the price, as they reflect the underlying physical supply/demand balance.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. 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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