ENERGY OUTLOOK

By Syed Rashid Husain


The inevitable has arrived!
Slackening demand, increasing supplies, slow down in China and heightened anxiety about the state of global economy is beginning to assert and rather heavily. Oil is on a losing spree, falling and falling.
Markets have lost almost 10 percent over the last couple of weeks. Benchmark US crude lost 95 cents Friday to finish at $96.13 in New York. Brent lost 47 cents to end at $112.26 per barrel in London.
A major transformation has taken place. Market sentiments - so crucial in this crude business - have undergone a major metamorphosis. And not an abrupt one. It has been in the making for some time now. Fundamentals have relatively been strong - for the last few months. Yet, for a period in time, fear premium continued overriding the strong fundamentals. And pundits knew - there was a limit to it. Ultimately the markets would get back into senses. In the longer run - fundamentals rule!
The demand side of the global equation has taken a direct hit from the slumping state of the global economy. Markets are taking cue from emerging data, underlining that the economies of the US, Europe and China are slowing. As unemployment reached 24 percent, Spain said its economy slipped into recession last quarter. And while, Greece struggled to form a government and preparations went underway for the Socialist President-elect Hollande to take over France, nervousness was visible in Madrid and Rome too, with their government borrowing rates rising to unprecedented levels. Chaos seems all around.
On Friday, the European Union estimated that the economy of the 17 countries that use the euro is in recession in the wake of a debt crisis that has prompted savage spending cuts and a jump in unemployment to record highs. The European Commission forecast that the eurozone economy will contract by 0.3 percent in 2012 and grow by 1 percent next year.
Consequently, commercial oil stocks in OECD had risen now to above the five-year average for the first time since May 2011, bringing forward demand cover to 60.3 days of consumption, three days above the five year average.
Analysts are also eyeing the rising US crude inventories, which rose last week to a 22-year high. The US factory orders fell in March too, while the economy added fewer jobs than expected in April. "While it is easy to malign the European recovery, the latest round of US macro-economic data is troubling in itself," energy trader and consultant The Schork Group said in a report.
China, the world’s second-biggest oil consumer, reported Thursday that crude imports for April was 22.21 million metric tons, or 5.4 million barrels a day, the lowest level since December.
And while the demand is slipping, supplies are ample. Saudi Arabia was pumping around 10 million barrels per day (bpd), close to its highest for decades, and was storing 80 million barrels in case of any disruption in supplies. OPEC, as a group increased oil production by 320,000 barrels per day in April, Platts reported separately.
And while demand is softening, there seems some movement toward the easing of the tension on Iran, which helps in taking off at least a part of the fear premium from crude prices.
And interestingly on the other hand, Europe is getting uneasy - and divided - on the entire embargo regime. Britain said Thursday that it was in talks with other European Union members about possibly easing a provision of their Iran oil embargo that could cause harmful and unintended side effects because it bans Europe-based insurers from covering any ships that carry Iranian oil anywhere in the world. Most big maritime insurers and underwriters are based in Europe, and other buyers of Iranian oil are finding it increasingly difficult to buy the required liability insurance needed to ship it as the embargo’s July 1 enforcement date looms.
The provision has also been criticized as hastily conceived by many in the insurance industry, notably the associations of shipowners and charterers who pool resources to provide coverage. They are known as P&I clubs, for protection and indemnity.
There had been speculation that Britain, the global center of maritime insurance services and home to the International Group of P&I Clubs, would seek to delay the insurance ban in consultation with other European Union members. Reuters, quoting unidentified diplomats, reported Wednesday that the British would seek a six-month postponement.
Any movement in the direction would reduce a potential cause of spiking oil prices, none can deny. The uncertainty factor would, to a large extent, be taken care off. And this would add to the existing pressure on the global crude markets.
Oil markets are now under double squeeze - from both - the demand and supply sides, bringing it back to senses - finally - after a long detour.