Why oil prices aren’t moving

Global oil demand growth slows to just 0.5 per cent, from more than 3 per cent in the second half of 2010, even as European benchmark Brent crude still trades at between $110-115 a barrel.

Continued macroeconomic pessimism seems to be spreading from the US and Europe to developing countries where oil demand growth remains positive, but has almost halved from nearly 6 per cent in the first half of 2010 to just 3.3 per cent in the first six months of this year.

So why haven’t oil prices reflected this? The reason, according to the London-based Centre for Global Energy Studies is short supplies.“While oil market fundamentals remain tight, oil prices will not fall, no matter how dire the global economic outlook. Without more supply, only another demand collapse will bring prices down,” says the CGES.

This is despite Saudi Arabia adding almost 1 million barrels a day of production, and Europe’sInternational Energy Agency (IEA) recent release of 60 million barrels of crude and products from its strategic stocks.This only prevented prices rising further, but did little to bring them down.

In any case, most of the additional production was consumed locally “with no apparent increase in Middle East liftings”.

Speaking to reporters at an event in Dubai on 19 September, Al-Badri Abdallah al-Badri, secretary general of oil producers’ group, Opec said the call on the group’s supplies is expected to remain steady at 30 million b/d until the end of the year.

”What we are seeing at this time is demand will be lower, but not that much, only 0.1 per cent. Not enough to generate any action,” said Al-Badri.

Nonetheless the Arab Spring continues to cause jitters in the market, and Al-Badri believes its has resulted in a built in premium of between $16-20 a barrel.

US benchmark West Texas Intermediate (WTI) prices stood at $85.70 a barrel on 19 September, while Europe’s Brent crude traded at $112.28 a barrel. The twelve crude basket from Opec averaged $108.68 a barrel.