Deep pockets or empty pockets?

Author Ben Winkley

When the IEA and Opec release their monthly reports, the market sits up and takes notice. This month, the IEA grabbed the eye with its talk of “unexpected pockets of demand”, four words that were enough to help Brent back up to three-month highs above $63/bl.

When the IEA and Opec release their monthly reports, the market sits up and takes notice. This month, the IEA grabbed the eye with its talk of “unexpected pockets of demand”, four words that were enough to help Brent back up to three-month highs above $63/bl.

Opec appeared similarly quietly optimistic. Global product demand is improving, it said, as is expected demand for the crude produced by its members.

Welcome news, then, for those who think the past year’s price slide is overdone. At a time when crude producers are either unwilling or unable to cut back, even a twitch of life from consumers will be seized upon as a move toward a more balanced market.

But go behind the headlines and the narrative of a planet that is newly thirsty for oil begins to fray. The IEA says demand was propped up in many large consuming countries by a cold snap, and its outlook for OECD oil demand for this year is essentially flat. Opec should be relieved rather than celebrating if there are signs of demand strength — it has the collective taps wide open and shows little sign of slowing the flow.

The IMF thinks the prospects for growth remain moderate and uneven. Signs that India is the new super-consumer nation need to be weighed against concern that the Chinese economy may land with a bump after all. Recent economic data from the US — job creation, consumer spending, industrial output and home building, all lead indicators for oil demand — have surprised to the downside. This means the European economy, of all regions, is the one functioning better than expected. Barclays says the boost from lower oil prices has been stronger than anticipated, but this must be seen in the context of the European Central Bank’s easy-money policies.

In fact, a look at comparatives from a year ago is perhaps most instructive. The IMF’s April 2014 forecast of global growth for this year was 3.9pc — now it is 3.5pc. The IEA and Opec forecasts for the call on Opec crude in the current quarter are lower than the forecasts they made in June last year, when the price of Brent was twice as high as it is now. The IEA’s unexpected pockets may not be all that deep.

For more information, please contact OilBlog@argusmedia.com

Comments