Demand looking forward
We share the IEA's view that growth in demand in 2010 is likely to be greater than the 0.6m b/day in 2009: they forecast non-OECD demand for 2010 at 40.8m b/day (up by around 1.5m b/day (4%), driven mainly by higher consumption in China and the Middle East. We are not quite so bullish, and are modelling 40.5m b/day (i.e. up 1.2m b/day). Both we and the IEA are assuming flat OECD demand.

A number of commentators have focussed on the fact that 2008 and 2009 are the first two consecutive years of North American oil demand decline since the early 1980's. However, the 2007-9 global demand decrease of 1.6m b/day equates to less than 2%, which does not seem very big given the scale of the banking crisis and the global slowdown.

Inventory levels
OECD total crude and product inventories look loose - the October 2009 inventory level is at the top of the ten-year range - but is expected to tighten in the early part of this year.

Conclusions about oil
From the low of $31.42 on December 22 2008 we have seen the oil price (WTI) recover to above $70 by May, and most recently range trade in the low 80's. This is not particularly supported by the immediate supply/demand and inventories balance which shows that though OPEC cuts match demand destruction, inventories remain high. It follows that some combination of speculative demand, dollar hedging and the animal spirits of traders have been at work.

Eoin Treacy's view It is now widely accepted that speculators played no small part in sending oil prices to their 2008 peak near $147. Their desertion of the market as liquidity conditions tightened also contributed to the subsequent plunge. The debate on the merits of allowing speculative investors to build up large long investment positions in commodity futures contracts has fallen by the wayside of late which can be seen both as an indication that current oil prices do not offer a significant headwind to the global economy and that oil's ranging uptrend is moderate enough not to contribute to inflationary fears. However, if oil prices were to accelerate higher, in a manner similar to that last seen in 2008, we can expect this debate to come back to centre stage rather quickly.

West Texas oil prices have been ranging higher for most of the last year and found support this week above $70 which is the latest in a sequence of higher reaction lows. The volatile nature of the trend to date has resulted in a dearth of consistency characteristics which indicates that the dominance of the demand component is less emphatic than seen previously. With such volatility inherent in the price action, one has to be somewhat cautious about becoming overly bearish or bullish at the range's extremes.

West Texas' progression of higher reaction lows was broken in September but prices rallied back into the overhead range shortly afterward. In the last two weeks both the African Bonny Light Sweet Spot and the European Urals Spot prices broke their progressions of rising lows but are this week posting upside key reversals. This action suggests that in such a trading environment, positions need to be given some leeway in order to allow for temporary inconsistencies and position size needs to be tailored accordingly. Regarding the West Texas price, we can continue to give the benefit of the doubt to the ranging uptrend provided it does not sustain a move below $70 for more than a couple of days.

Brent Crude found support in the region of the December low, also above $70, last week and would need to sustain a move below that level to question potential for further higher to lateral ranging. The TOCOM Tokyo traded contract has a similar pattern.

The Reformulated Gasoline contract has been ranging mostly below $200 since June and posted a failed upside break in mid-January. It has since found support in the region of $190, which is also notable as the current level of the mean, defined by the 200-day moving average, and would need to sustain a move below that level to question scope for further higher to lateral ranging. Heating Oil's pattern is more similar to that of oil.

Natural Gas bottomed near $2.35 in September and continues to advance, finding support most recently above $5. A sustained move below that level would now be required to mark a major inconsistency since it would break back into the underlying trading range and decline below the 200-day moving average.

Coal prices have sustained an incremental progression of higher reaction lows since May last year and broke upwards last month. The subsequent pull back found support near the mean at $52.50 and a sustained move below that level would now be required to question scope for further higher to lateral ranging.

Uranium remains the laggard in the energy sector. Prices have been ranging above $40 since October 2008 and have shown a downward bias since June. A sustained move above $46 is required to break the medium-term downtrend while an advance above $60 is needed to complete the base and signal a return to demand dominance.

With the possible exception of uranium, the above charts confirm the view that energy prices have bottomed but that demand dominance is not yet capable of supporting significantly higher levels. Most of these charts have relatively intact progressions of higher reaction lows which would need to be taken out on a sustained basis to question potential for continued higher to lateral ranging over the medium term.