NEW YORK – Investors are laying the groundwork for another bull run on the energy and commodities markets, in spite of signs suggesting the overall economy is still deteriorating.
Analysts and economists are saying with some confidence that oil prices have bottomed out. And Wall Street is taking notice that spot and futures prices for West Texas Intermediate crude have risen by nearly 40 percent since hitting $33 in December. At press time, benchmark WTI was trading at close to $54 a barrel on the New York Mercantile Exchange (NYMEX).
The best data show U.S. demand for oil is still weak. On Tuesday, the American Petroleum Institute reported a 4.6-million-barrel buildup in U.S. crude stockpiles, pushing prices lower. Demand in China is off by at least 15 percent year-over-year, and other bearish economic indicators will likely keep prices volatile in the short term.
But oil market watchers say the Organization of Petroleum Exporting Countries, or OPEC, has conclusively dropped production faster than demand has fallen. The cartel, which controls roughly 40 percent of global oil production, has cut output by about 8.5 percent over the same period last year, while global demand is down by a little over 2 percent, according to the U.S. Energy Information Administration.
Citigroup energy analyst Tim Evans, who has been tracking oil and gas markets since the mid 1990s, says some economists erroneously predicted that most OPEC members would cheat on their commitments and pump above their quotas after oil prices plummeted from a record $147 a barrel last July to the mid-$30 range by the end of 2008.
Preliminary February numbers "suggest the market balance between supply and demand is tighter than it was a year ago when we were trading $110 a barrel," Evans said. "Over the longer cycle, I don't like to bet against OPEC."
The impact of the down economy has been felt more on the supply side than on demand, as reflected in OPEC's response, but especially in the sharp fall-off of new exploration and production activity in non-OPEC states, experts say.
Once economies start growing again – Moody's Investors Service expects the turnaround to start in early 2010 – supply won't be able to come on line fast enough to meet demand. That mismatch suggests energy prices are poised to begin spiking again.
Analysts believe OPEC could boost production later this year, but only if prices rise above $70 or $75 a barrel, a level deemed appropriate by OPEC states whose national budgets depend on fossil fuel exports. NYMEX traders sense crude prices returning to $60 a barrel in short order, notwithstanding the possibility of wild swings as the market responds to overall economic trends.