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Crude oil price correction may have further to go

Crude oil futures fell in late January by almost $10/b from the 15-month high reached on 11 January of almost $84/b. On 25 January, New York's front-month light crude oil contract was back below $75/b because of a surge of bearish, global economic news.

These included signs that China, the world's second-largest energy consumer, may tighten monetary policy as its economy booms. In Europe, meanwhile, there are growing concerns that Greece's dire economic problems could spill over into the rest of the continent. And in the US, President Barack Obama's proposed restrictions on the US banking sector has led to worries they would not only undermine the financial sector's profitability, but also result in a decrease in liquidity on commodity markets.

In addition, there is little evidence that the recent cold weather in the US and northern Europe has offset the growth in global oil supply over recent months (see p39), or reduced the amount of oil in storage. "Rising Opec production over the winter demand peak is likely to delay the necessary inventory draw-down and could mean the price correction has further to go," Pareto Securities, a brokerage, said in a research note.

Looking further ahead, some analysts expect oil-price movements in 2010 to be divided into two distinct phases: demand driven and supply driven. In the first half of 2010, demand for oil will be particularly influential in determining prices, given doubts over the sustainability of global economic recovery and plans by several large economies to phase out stimulus packages.

In the second half of 2010, oil prices are likely to be supported increasingly by supply side factors, such as the decline in Opec's surplus capacity or the expected production decline at Mexico's Cantarell oilfield, the world's second-largest oilfield (PE 1/10 p6).


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