Crude oil in directional crisis…

Crude oil prices have been recently facing some directional crisis for months now. Some significant facts
over why this is happening.
Demand:
1. China’s demand surged by 8.5% by the end of August 2010. The pricing mechanism of China
made hoarding of stock very rampant, as the country had a system of
aligning their benchmark crude oil prices with basket of international
crude, if the prices fluctuate more than 4% over consecutive 22 days.
The coming rise or fall in the domestic prices could be easily gauged by
the traders. Now under the new proposal (pending implementation) the
period will be halved thus discouraging the hoarding.
2. India’s demand for petrol has increased by 11.4% mainly due to 33%
increase in monthly car sales as on august 2010. Diesel just showed a
demand growth of 3% because good monsoons and less power outages.
3. Demand in North America rose by 2.6% year-on year in august 2010.
There have been no significant reasons for this minor surge in demand.
4. Iran’s gasoline imports reduced significantly by 15% due to the new
sanctions imposed, and also due to rationing of gasoline followed by
reduced subsidies on gasoline prices. Iran has been producing gasoline
itself, but at the cost of other petrochemicals that it produces and export which in the long run will
hurt its economy on both sides.
5. Europe showed a demand surge of 2.7% in august 2010 compared to last year. This surge can be
contributed to continuous demand from Germany and France for heating oil for their coming
winter demand. Germany in particular increased its heating oil deliveries by 114%.
6. Japan’s overall demand rose by 4.7% and that of Korea by 6.6%. This demand was mainly
because of warm weather conditions, which surged the power demand for air-conditioning.
Supply:
1. Global oil supply has decreased by 150 Kb/d to 86.9 Mb/d as on September due to lower non-
OPEC output.
2. Iraq this month announced an upward revision of 25% in its crude oil reserves to 143 billion
barrels. Its exports have also increased to 2.52 mb/d since the coalition’s invasion in March 2003.
3. Iran’s crude oil output reduced to 3.68 mb/d. Iran has crude in floating storage of around 33 mb
which no doubt is 17mb less compared to last year around this time. With the sanctions in place
the refiners and traders are not able to arrange for bank finance and insurances, Iran still
manages to sell its cargo shipments to certain European companies at really steep discounts. Also
to note that China has increased its imports of Iranian crude oil taking advantage of their steep
discounts as the country is reeling under economic turmoil due to sanctions.
4. Russia which does not allow access to oil fields except to state owned oil companies has been
sending feeler that it may allow foreign companies access it oil and gas resources. The decisions
are yet to be finalized. It is also very keen on starting its offshore development in Arctic and
Barents Sea.
With all these facts in place crude oil has yet to set a directional move. A close watch on prices will give
some convincing results over some days to come.