January 22, 2008

Focus: IEA Monthly Report

This past week the IEA (International Energy Agency) released their monthly energy report.  The IEA, which is a cooperative effort of OECD countries, focuses on the global supply demand situation and has been one of the more vocal proponents of increases in OPEC production levels. .

The report once again focused on the relatively tight supply situation and prospective drawdown in stocks, which they see as the major factors supporting energy values this year. Highlights and analysis of key components of the report:

• The strength to energy prices which saw crude as high as $100/bbl in early January was traced to falling stocks, cold weather and tight fundamentals. Geopolitical tensions in Nigeria and the Middle East also continue to be mentioned as supportive influences. Fund positioning to a large extent was downplayed, although we suspect this has played a larger role in the support to values than what has been alleged. This is a key argument of OPEC members against an increase in quotas, as they allege that some of the excesses in the market can be attributed to speculative forces rather than supply/demand fundamentals.
  
  
• Another key behind the strength to values is the decline in OECD industry stocks. Stock levels in the U.S., Japan and the EU fell by 38.1 mb/d from October, while the decline year over year was substantial at 123.8 mb. Another 30.7 mb decline was forecast for December. For January, we are looking for a slowing to persist, with a more balanced situation developing as we move into the 2nd quarter. These pressures might build if demand softens more than currently expected given the global economic concerns linked to the subprime crisis.
  
  
• It appears that an expansion in supply has occurred, with world supply in December reaching 87 mb/d compared to 86 mb/d a year ago. However, the bulk of the increase continues to be accounted for by OPEC, where production rose by 825 tb/d to 32 mb/d in December.
  
• They revised upward 2007 world oil demand by 150 tb/d to 85.8 mb/d. Surprisingly 2008 demand was maintained at 87.8. The forecast assumes that the subprime crisis will not have an impact on demand. Given recent movement in global equity markets, this appears overly optimistic.
  
  
• Refinery throughput remains high and is expected to reach 75.2 mb/d in January compared to 73.9 mb/d a year ago. Given the higher levels and potential for demand being restrained, refinery margins should continue to be squeezed.

Given concerns over the global economic situation, the prospects for the crude oil market appear limited until these factors work through the markets. Risks still appear on the downside as the supply/demand balance improves in the first half of 2008. The more aggressive easing by the U.S. Federal Reserve seems to confirm that the economy has them very concerned, which has the potential to put risk on the downside in crude toward the 84.00 area basis March, provided rallies do not carry values back above the 92.30 level. Toward the lower end of this range better support should emerge in the back months in anticipation of renewed tightness in late 2008.  The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation.  The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition.  The information and comments contained herein is provided by ADM Investor Services, Inc. and not Archer Daniels Midland Company.  Copyright © ADM Investor Services, Inc.