Crude oil likely to consolidate at $85-90

In the past five months, crude oil prices, unlike that of other industrial commodities, traded in the $75-85 range per barrel.

While there have been recurrent upward revisions to demand estimates for 2010 by many market bodies like International Energy Agency ( IEA) and Organisation of Petroleum Exporting Countries ( OPEC), the current prices near $80 seem to have factored in these assessments.

Moreover, inventories in the US, a major consumer, and a leading indicator of the Organisation for Economic Co-operation and Development (OECD) demand, are currently running well above their five-year average.

However, given the influence of the US dollar on the overall market liquidity and commodity prices in the past two years, a move towards $90 is likely if the cap of $85 is overtaken. The recent crude price run has come due to a pull-back in the US dollar index, while the sentiment build-up towards the latest OPEC meet to decide the production quota also provided a boost. This caused global prices to gain more than 4% since end-February.

OPEC, at a recent meet, decided to keep the production quota unchanged. However, the cartel also expressed concerns over the possibility of oversupply affecting recovery in demand in ’10. OECD countries’ demand saw an average dip of 1.5% for the six quarters starting from ’08 and it saw a bounceback by a similar average of 1.7% to 46 million barrels per day (mbpd) in the last two quarters of ’09.

On the other hand, demand from non-OECD countries increased at an average of 1% per quarter between the start of ’08 and till the first half of ’09. However, the past two quarters saw a flat growth.

However, rising Chinese imports could boost demand. The YoY change in Chinese imports has gained a pace since September ’09, and particularly, in the first two months of ’10. Even after a general contraction in demand, supply from non-OPEC countries remained healthy since the last quarter of ’08 and has seen a QoQ jump of 1.4% for the three months ended December ’09.

Against this, supply from OPEC reflects the demand and price recovery, since the same started to grow only after the third quarter of ’09. The pace in the non-OPEC supply is intensified, as the supply from Russia has remained high, thanks to production reaching an all-time high in February ’10.

While growing demand in the US looks encouraging, inventories have again started to build up. The YoY change total oil demand has started to inch up the negative gap. However, weekly inventories of crude oil have moved further up from its five-year average.

However, since early February ’10, they have again started to move away from this average, indicating price constrains on the higher side.

Moreover, a latest Commitments of Traders (CoT) report, an account of the break-up of open positions of various participants in the NYMEX F&O market, showed that non-commercial net-longs were at a near record high.

The recent run in prices is curtailed by a resistance near $85, since positive fundamentals are factored in. However, given the recent market reaction to any positive news and the negative correlation of prices with the dollar index (of the order of 80%), a breach of this resistance could cause further consolidation in the $85-90 range.