Bullish factors for crude prices include 1: the unexpected decline in weekly crude oil and distillate inventories (crude oil -1.85 million bbl versus expectations of +1.0 million bbl and distillates -388,000 bbl versus expectations of +700,000 bbl), 2: the increase in compliance in OPEC production quotas in Aug to 53.5% from 52.6% in July, and 3: the recent rally in US and European stock markets to 1-month highs, which fuels optimism that the global economic recovery and energy demand may strengthen. Bearish factors include 1: the action by the US Energy Department to cut its 2010 crude oil price forecast to an average of $77.37 a barrel, down from last month's forecast of $79.13 a barrel, citing the reduced projections for US economic growth, 2: the action by OPEC to cut their 2011 global oil demand forecast to 28.8 million barrels a day, 100,000 barrels a day less than last month’s forecast, and 3: Citigroup’s cut in its 3-month crude oil price forecast to $74 a barrel from $78 and in its 6-12 month forecast to $83 from $85 a barrel, citing high inventories and “downside risks” to US economic growth.
Crude oil inventories basically have moved sideways since May and have not come down as they should at the end of the summer driving season. In the latest week, crude oil inventories were 8.7% above their 5-year seasonal average, which was the highest figure since May 2009 when the U.S. recession was drawing to a close. Product inventories are also high with gasoline and distillate inventories 8.9% and 19.3% above their respective 5-year seasonal averages. The high level of product inventories can be directly attributed to weak demand. there is little chance of a surge in US and global economic growth, the only solution for the oil market is for oil prices to either work their way lower to find stronger demand or for OPEC to start cutting production. OPEC production has been virtually unchanged since February 2010 at about 26.8 MBPD. However, non-OPEC production has been rising since mid-2009 and in July hit a new 5-year high of 49.9 MBPD. If OPEC doesn't want to see a continued deterioration in oil prices, then the cartel is going to need to start cutting production. As usual, the responsibility to cut production will fall first on Saudi Arabia as OPEC’s swing producer and chief market-fixer.
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