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Monthly Oil Bulletin

Source: Global Investment House

Oil Prices Recover Amid Positive Economic Signals

Oil prices recovered strongly as positive statements from policy makers in the US along with encouraging economic news emanating from the Euro-zone raised hopes of world economic recovery. US crude price increased by 7.4% during the review period (17 Aug 09-17 Sep 09) to settle at US$72.49 per barrel mark. US crude oil price has lost 50.0% since it reached an all-time high of US$145.16 per barrel on 14 July, 2008. Decline in US oil stocks along with weakness in US dollar against major currencies funneled funds into commodities as a hedge against inflation. A weaker US dollar also makes it much cheaper for foreign investors to invest in US dollar-denominated commodities, thus leading to an increase in price. Oil prices have become extremely volatile in the past few months reacting to contrasting economic signals. Despite some encouraging signs, there are significant challenges left for the world economy and the recovery process is likely to be a slow one. OPEC basket and Kuwait export crude price remained more or less constant declining by 1.2% and 0.9% during the review period to settle at US$70.27 and US$69.62 per barrel, respectively.

World oil demand is expected to average 84.1mn bpd in 2009, a decline of 1.6mn bpd YoY. The decline in OECD oil demand is expected to outweigh demand growth from Non-OECD countries. World oil demand growth will come largely from China and Middle East. The global financial crisis, which originated from the advanced economies, has eroded oil demand significantly. Though economic decline seems to be decelerating, the timing and magnitude of recovery is uncertain. According to OPEC, the world oil demand is expected to recover by 0.5mn bpd in 2010. Unemployment rate in US surged to 9.7%, after 216,000 people were made redundant in August, 2009 which was below consensus estimates indicating that recession might be levelling off which might lead to recovery in oil demand when the economic activity starts picking up.

World oil supply averaged 83.98mn barrels per day in August, an increase of 0.37mn barrels per day from July levels (OPEC). The increase came from an increase in OPEC production by 0.09mn barrels per day. OPEC share of world crude oil supply is estimated to have increased marginally to 34.3% in August, 2009. The increase in production came mainly from Kuwait, Venezuela and UAE. OPEC in its ministerial meeting in Vienna, Austria on 9th September decided to keep production levels unchanged.

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