Oil Prices Due for Short Term Setback

I am still long term bullish on oil prices, but don’t be surprised to see a near term correction soon.

After tumbling to a low of $33.98 on February 12, crude oil more than doubled in prices before tumbling recently on a worse-than-expected jobs report. It is important to note that the recent rise in oil prices is not supported by supply/demand fundamentals. It is essentially the result of a shift in market sentiment and a corresponding reversal in US stocks, not a material change in the global economy.

And because of the five month rally has proceeded at an exceptionally quick pace, its is made prices more volatile, and that suggesting prices could experience a significant correction in the short term.

Historically, equities have been a leading indicator of economic growth and commodities have been a coincident indicator. Right now, we are seeing commodities and equities move together as money comes back in at the same time. Additionally, many speculators reversed their positions on oil from short to long, and that can also pull prices higher. Some US$3.8 billion has flowed into oil-and-gas exchange traded funds this year compared with US$1.4 billion in the first half of 2008.

Considering that supply seems ample and demand is weak, but those factors are being overwhelmed by a hugh sigh of relief that we are not going to have the Great Depression. A lot of money is coming out of mattresses.

The perception of the economic recovery may have changed, but the underlying supply and demand fundamentals have not. There is still a glut of oil in the market and not enough demand to soak it up.

In its five year forecast for the world wide oil market, IEA cut its five year forecast for global crude demand and predicted that consumption won’t rebound to last year’s levels until 2012 – at the earliest, based on the IMF forecast for global economic growth of 5% a year between 2012 and 2014.

If that is true, oil prices would only be setting themselves up for a bigger tumble when the economy slips back into possibility of recession later of the year.