The Oil Outlook, April 2010: Crude's Irrational Exuberance

By Gianna Bern, President, Brookshire Advisory and Research

While the oil industry value chain is generally quite happy with $86 per barrel crude prices, one must ask whether this recent rally is sustainable. On April 6th crude reached an 18-month intraday high of $87.09 per barrel. In just the past 10 to 15 days, crude has increased $4 to $5 per barrel depending on how you view the situation. Place this within the context of relatively high U.S. crude oil inventories and it begs the question, is there the fundamental strength in the market?

Crude Inventories

For those who follow U.S. crude oil inventories, inventory levels have posted 10 weeks in-a-row of inventory growth. The bright spot in the market has been a fairly healthy RBOB / gasoline complex. Gasoline inventories have begun to come into line with the seasonal draw downs as we approach northern hemisphere summer drive season. As a result, gasoline spot prices on both sides of the Atlantic have had healthy upticks in pricing.However, U.S. crude inventories are still above the five-year average of 337 mm barrels. The U.S. Energy Information Administration just reported yet another week of inventory builds of 1.98 mm barrels to bring the most recent report to 356.2 mm barrels. All things considered, it may be fair to say the crude market is getting ahead of itself.

Greek Drama

The Euro has been somewhat volatile in recent weeks as the market sorts out reaction to Greek debt plans. As a result, the dollar has had some recent strength. On April 7th, the U.S. dollar was at $1.3327 to the Euro. I don't think the market is in the clear on the Greek situation. Finally, there has been some recent strong economic data that has been released regarding manufacturing and job creation that has buoyed the market. The market is looking for any positive economic data even though the jury is still out on sustainability.

Crude Outlook

I do think the crude market will experience a retrenchment in the very near-term. I define this time horizon as the next several weeks. Certainly, over the remainder of the year, crude oil prices will still have a very good story.
As long as economic recovery proceeds, I believe that we will see crude prices in the $90 to $95 dollar per barrel range. Therein remains the wild card. To date, I would characterize global economic recovery at fragile at best.
Without a doubt, Asian economies are leading the way in terms of growth. The U.S. and European economies are slowly trailing behind. Most economists are placing average OECD GDP growth numbers in the 2% to 3% range. These conservative estimates are far below that of emerging market economies such as India, or China that are posting GDP numbers in the 5% to 6% range. All told, crude oil is enjoying a rally that will generally support the market into the remainder of the year. While we may experience some near-term retrenchment, l anticipate healthy crude oil prices north of $90 per barrel into the third and fourth quarter of 2010.

About Gianna:

Gianna Bern is a registered investment advisor and President of Brookshire Advisory and Research, Inc.

About Brookshire:

Brookshire is an investment advisory firm focused on energy investment research, risk management, and credit portfolio management with clients in Europe, Latin America & the U.S: www.brookshireadvisoryandresearch.com