Oil Price

The story with the oil price through most of 2009 to date has been
one of weak fundamentals and strong technicals. The dichotomy is
still with us.

There will be significant spare production capacity over 2009 - 2010.
Crude inventories or carry stocks are running high and demand
remains suppressed. Storage is becoming an issue. Nonetheless, the
oil price has rebounded far in advance of when we would normally see
a cyclical recovery of price.

There is the usual chatter about geopolitical problems, but my guess
is that we are witnessing a fundamentals recovery anticipation rally
predicated on the idea that excess capacity, which is substantial, is still
not that high compared to prior recession periods, and will be quickly
dissipated by a recovery of demand once the global economy begins
expanding. And, as I have discussed in recent weeks, the short term
leading economic signals have bounced sharply since early Mar., which
has added to bullish urgency in the oil trading pits. The second key here
is the idea that once demand rises enough to begin to push up operating
rates at the well head, we will witness an extended bull market in oil
once again as traders welcome a progressive draw down of spare
capacity.

The most common way to blow an oil price forecast based on the
fundamentals is to chalk up a miss on the demand side of the equation.
So, you have to have an undisputedly reasonable bounce in the global
economy before 2009 is out, and I suspect, what else is needed is a
low sensitivity to a rising price by consumers until the price reaches
much higher levels, say $75 - 80 bl. These are rational assumptions
but carry rather significant risk in a still uncertain environment.

On the technical side, the oil price is in an intermediate term uptrend
but is decidedly overbought with mild extension in the price. CHART.