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Source: NCB Capital

Oil: Has an era of stability dawned?

Oil has gained itself a reputation as a highly volatile commodity, a state of affairs variously explained through tight demand-supply fundamentals and the increased importance of financial investors. During the past two years, it has scaled to historic highs and provided painful reminders of the long era of cheap oil in the 1990s. Although the range from USD35 to USD147 a barrel has been unusual, the market appears to have become significantly more stable in recent months. While the oil price has been supported by the aggressive stimulus spending undertaken by governments over the past year, there is widespread consensus that the current prices do broadly reflect the market fundamentals. Even OPEC representatives have voiced their contentment with the price level, not least because it is seen as consistent with adequate investments going forward.

The disturbing aspect about the current oil price is its historically high level even in the face of the worst global economic crisis since World War II. The oil price correction of 2008-2009, however sharp, was fairly limited in duration. Starting in the spring of 2009, oil prices resumed their ascent and while much of the momentum has been lost, at least for now, they are once again at levels little different from what was seen during much of the economic boom of 2003-2007. This raises significant concerns about the price implications of a sustained economic recovery, even if the substantial spare capacity of especially OPEC producers does offer at least a short-term cushion. Right now, that cushion of spare supply is approximately 6 mbd, which compares to total global oil demand last year of 84.32.mbd, as estimated by OPEC. The increased buffer was in large part due to 3.1 mbd production cuts by OPEC in late 2008-2009.

Uneven demand. The remarkable resilience of the oil price has been above all due to the strength of demand from emerging markets. According to OPEC estimates, emerging market oil use in 2008 totaled 38.14 mbd, followed by 38.71 mbd in 2009. Their share of total global oil consumption increased from 44.5% to 45.9% as demand in the West actually contracted. The emerging markets are likely to consolidate their position as key drivers of the oil market in view of the differentiated economic outlook for them and the OECD region. For instance the latest IMF-World Bank projections see growth of 1.8-2.1% for the advanced economies in 2010, as compared to 5.2-6.0% for the emerging markets

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