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FACTBOX: Bullish and bearish factors behind the oil price

(Reuters) - Oil prices hit a high for this year of $82 a barrel in late October, marking a roughly 150 percent recovery from a low of $32.40 hit in December last year.

U.S. crude has since dipped slightly to around $80, little more than half last year’s record high of nearly $150 a barrel.

The following lists the main bearish and bullish factors in the market.

SLOW RECOVERY IN DEMAND

Major forecasters, including the Organization of the Petroleum Exporting Countries, the International Energy Agency and the U.S. government’s Energy Information Administration, expect fuel demand to increase next year.

The growth will be sluggish, however, compared with the deep contraction in fuel use triggered by financial crisis. Demand for OPEC crude is expected to stay low.

INVENTORIES

Weak demand has generated huge stockpiles, which translate into a contango structure on the oil market, meaning crude for early delivery is cheaper than that for a later date.

The stock build is particularly marked for distillate stocks, which include diesel and heating fuel, and have reached their highest levels for nearly three decades.

Analysts have said even a severe winter would be unlikely to draw distillate levels back down to the average.

In addition to the large amounts of fuel storage on land, traders have built up fleets of floating of storage at sea, which have been rising since April.

Shipbrokers say volumes of oil products stored at sea have risen to more than 90 million barrels.

The fuel has been stored on vessels rather than on land as traders have taken advantage of cheap freight rates and market structure, which means they can make a profit from buying now and selling later.

Distillates are still in a deep contango -- when prompt contracts are cheaper than those for later delivery -- while the contango on the crude futures market is less than a dollar.

OPEC

Faced with rising stocks and weak demand, OPEC late last year said it had agreed to reduce supply by 4.2 million barrels per day compared with last September’s output.

At its most disciplined earlier this year, OPEC compliance was around 80 percent of agreed cuts.

It has since slipped to just above 60 percent, according to analyst estimates <OPEC/O> but although production has risen informally, there has been no official change to output targets, marking one of the longest periods of steady OPEC production policy.

At its last meeting in September, OPEC acknowledged inventory levels at the equivalent of more than 60 days of forward supply were much higher than the roughly 55 days the group has traditionally considered comfortable.

But Saudi Arabian oil minister Ali al-Naimi predicted confidence in economic recovery would be sufficient to support the market in defiance of inventory levels.

He has also said the world’s economy was ready to cope with oil at around $80 a barrel, a level producer nations have said is acceptable for consumers and high enough to generate investment in new supplies.

OPEC next meets in Luanda on December 22 to reconsider policy.

CROSS-ASSET RALLY

Last December’s slide to the lowest price for nearly five years coincided with a huge deleveraging by some market players.

Investors fled oil and other risky assets and in some cases moved into the relatively safe havens of gold and the dollar.

Vast amounts of liquidity provided by central banks, responding to government stimulus plans, have triggered a rally across a wave of asset classes, including oil, which has at least temporarily lost its value as a portfolio diversifier.

Oil's climb to its highest level this year mirrored a rise by equity markets to their highest this year. .MIWD00000PUS

At the same time, the dollar has .DXY weakened against a basket of currencies, in part because very low interest rates have inspired investors to seek greater returns elsewhere.

Dollar weakness can be a spur to dollar-dominated commodities, which become relatively cheap to non-dollar investors.

Gold, in particular, has been buoyed by a flimsy dollar and touched a series of record highs. Analysts say the dollar could have further to fall.

For a graphic, showing the performance of a range of commodities, please click on: here

REGULATION

Last year’s run-up to record oil prices and the financial crisis led to renewed calls for tighter regulation.

U.S. regulator the Commodity Futures Trading Commission (CFTC) is moving toward issuing a proposal in early December to set limits for commodity trading positions.

Some analysts have said this could have a bearish impact on oil markets.

IntercontinentalExchange ICE.N Chairman and Chief Executive Jeffrey Sprecher said the position limits were more about limiting concentration, rather than speculation and that the price impact of speculation was extremely hard to prove.

POLITICAL RISK

Given the high volumes of spare oil capacity following OPEC output cuts and swelling inventories following reduced demand, nervousness about any possible supply disruption is minimal.

The oil market is nevertheless monitoring OPEC member Iran’s dispute with the West over its nuclear program and threats of U.S. sanctions. Iran has always said its nuclear ambitions are limited to power generation.

But the United Nations’ nuclear agency has said it is concerned Iran’s belated revelation of a new uranium enrichment site could mean it is hiding further nuclear activity.

Militant violence in OPEC member Nigeria has forced the shut in of thousands of barrels of oil.

President Umaru Yar’Adua has embarked on the most serious effort yet to end the years of unrest. Up to 20,000 former gunmen signed up for an amnesty that ended in October but the government and militant leaders have yet to agree details of the post-amnesty program.

CHINA

The demand surge associated with the record price rally was led by an economic boom in China, which, according to IEA data, in 2003 overtook Japan to become the world’s second biggest fuel consumer after the United States.

While most of the world sank into recession, Chinese growth has stayed positive. Together with India, it is expected to continue to spur fuel demand, but analysts said that could be instead of rather than in addition to new demand in the developed world, where fuel consumption is expected to stagnate.

Last year’s record price rally could have permanently destroyed some demand and also helped to increase political will to pursue environmental alternatives.

Any price surges driven by rising Asian fuel use, could in the context of a still ailing world economy, limit a rise in fuel consumption, especially in the United States, where gasoline consumers are regarded as especially price sensitive.

The IEA has predicted China would overtake the United States as the biggest energy consumer around 2025.

INVESTMENT IN NEW PRODUCTION

Oil companies as well as OPEC members have said that to ensure investment in the most costly new production, an oil price of around $75-$80 a barrel is needed.

Some projects were shelved because of credit issues and the poor economics associated with weaker oil prices, although the biggest oil companies said they have continued to invest and OPEC said a price rally had enabled some schemes to resume.

The IEA and other forecasters have said underinvestment in new supplies could mean prices will rally sharply once economic recovery stimulates consumption.

For next year, supplies are expected to rise and increased non-OPEC production will reduce the call on OPEC’s barrels.

Output from non-OPEC Russia climbed above 10 million barrels per day this year, making it the world’s largest producer, although Saudi Arabia remains the world’s biggest exporter and it has deliberately curbed output in line with OPEC curbs.

Analysts have said Russia could struggle to maintain output growth.

Compiled by Barbara Lewis; Editing by Angus MacSwan

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