Energy Report: In Like a Lion and Out Like a Lamb?

February 28, 2010 06:00 PM

By Phil Flynn, Alaron

Ok, I know it is a tired cliché about the month of March but probably apropos for the energy and stock markets. Last week's blistering hot GDP at 5.9% coupled with some strong data out of the Euro zone this morning has the market charging, well, like a lion. But is this aggressive move sustainable when you see weaker than expected data out of China. And if the economic data is so darned good, then why is oil demand just so darned bad?
Strong data out of Europe and weak data out of China should give us a mixed picture. In the Euro Zone manufacturing hit 30-month high in February.
The unemployment rate in Europe came in at a better than expected 9.9%. This seemed to over shadow the fact that the HSBC China Manufacturing Purchasing Managers Index fell to 55.8 in February from 57.4 in January. While still showing expansion it also shows that the world's second largest oil consumer may be slowing its demand for oil. We see that demand is still weak with ample global supply. In fact just last week the Energy Information Agency estimated that supply in OECD countries was 2.69 billion barrels at the end of 2009 which is the equivalent of about 58 days of forward demand cover and a whopping 90 million barrels above the 5-year average. With supplies so strong it is hard to imagine that even an increase in demand will really start getting us going.
The EIA says that they expect the world oil market will gradually tighten in 2010 and 2011, as the global economic recovery continues and world oil demand begins to grow again. Of course for that to happen they are counting on OPEC to hold back supply. And as the EIA said OPEC cut its crude oil production by 2.2 million barrels per day in 2009 and is one reason why WTI crude oil prices stabilized between $70 to $80 per barrel since the middle of last year. This range is consistent with the "fair price" range for crude oil proposed by King Abdullah of Saudi Arabia at the beginning of 2009. Oil prices hovered in this range despite sustained high levels of oil inventories and rising spare production capacity, which rose, in part, because of cuts in OPEC production. OPEC surplus crude oil production capacity currently stands at about 5 million bbl/d and could grow to 6 million barrel per day. However the EIA warns that  most of this surplus capacity is concentrated in Saudi Arabia, which is not likely to use it as long as the oil market is stable and its price target range is being met. 
Yet the Saudis might get tired of carry the burden as the rest of the cartel cheats away. Bloomberg News reported that OPEC increased crude-oil production to a 14-month high in February, led by a Saudi Arabian gain. According to the Bloomberg Survey OPEC output rose 125,000 barrels a day, or 0.4 percent, to an average 29.17 million barrels a day, the highest level since December 2008. January production total was revised 45,000 barrels a day higher. Bloomberg says that OPEC cut its production quotas by 4.2 million barrels to 24.845 million barrels a day beginning in January 2009 as fuel demand tumbled during the worst global recession since World War II.  The Saudis boosted output by 100,000 barrels to 8.25 million barrels a day, the highest level since December 2008. It was the largest increase of any member. The kingdom exceeded its quota by 199,000 barrels a day.
Despite oil marching in like a Lion, we fully expect the month to go out like a lamb. 

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Republished with permission from Alaron's Energy Report Daily. 

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