Oil prices collapsed 77% from $147 to $33 in the final 5 months of 2008, reflecting the massive downturn in global consumption now underway. Recently we have seen friction in the Middle East and Russia thrust a bit of a terror premium back into the mix, taking crude back to $50 a barrel this week. But as distracting as the geopolitics may be, the main plot of global recession continues unabated and demand for energy is not likely to pick up over the next year.
Meanwhile as the Wall Street Journal points out today:
“OPEC's quota reduction is unconvincing so far. And each cut increases spare capacity, which has doubled already to three million barrels a day. And as Deutsche Bank analyst Paul Sankey points out, while 1.5 million barrels a day represented a year's worth of demand growth in 2008, three million represents “infinite” spare capacity relative to demand when it is falling, as it looks set to do in 2009.” See Limits to Oil majors' largesse
At the same time, commodity index funds are beginning some rebalancing selling off gold and adding energy to top up their prescribed index weights. This will have some artificial impact on the price of these commodities. See: Beware, commodities index rebalancing ahead.
Energy gains have pushed the TSX up over the past 5 trading days. But given that the main plot of falling energy demand is likely to force its way back to center stage in the months ahead, we have to view this recent market rally with some scepticism. In a healthy bull market expansion oil is not the leading sector.
Cory’s Chart Corner
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