Oil facts of life catch up with commods rally

LONDON (Reuters) - The commodities rally -- a triumph of macro economic hopes over the harsh realities of poor demand, skeptics say -- may at last be backed up by market realities, in oil at least.

Global commodities benchmark Reuters-Jefferies CRB index hit six month highs this week.

U.S. crude futures have surged about 20 percent in May to a six-month high above $62 a barrel.

Gains so far this month surpass a 12 percent rise in May last year when oil was marching toward a record high above $147 hit last July.

Analysts have said the current rally has shown a disjunction between prices and fundamentals. It reflected optimism, mainly on equity markets, that the world economy could be beyond the worse and also investment techniques to hedge against a weak dollar.

“For most commodities we have run a little bit ahead of ourselves,” said Andrey Kryuchenkov, commodities analyst at VTB Capital in London.

“Certainly things are better than they were but it does not mean we are out of the woods yet. We are in the midst of a very serious crisis.”

There remained plenty of bearish fundamentals to choose from on oil.

Global oil consumption has not recovered since the price dive to five year lows of around $32 in December.

The International Energy Agency expects oil demand will post the sharpest yearly fall since 1981.

Crude inventories in the world’s top consumer United States remain close to a 19-year high.

Millions of barrels of oil are in floating storage with inventories ashore brimming.


But as speculators switch to net longs for many commodities, prices could rise further, although the global economy is forecast not to recover until late this year or next year.

Investors, however, are finding tentative evidence of a narrowing gap between fundamentals and prices, again from China.

Statistics last week showed China’s April commodities imports hit new highs after a strong growth in oil and copper imports in March.

“In our view, China has and will continue to contribute to the fundamental turnaround in commodities,” Goldman Sachs said in its metals research note, although the bank also cautioned demand from the rest of the world remained weak.

Barclays Capital holds a more bullish view that Chinese oil demand will rise this year as opposed to a forecast for a drop by the International Energy Agency.

“We expect Chinese demand to rise by 180,000 barrels per day this year, with some upside risk to that forecast,” the bank said in a research note.

“If that looks like happening, then that should help prices to reach their longer-term sustainable levels above $70 per barrel sooner rather than later.”

Olivier Jakob of Swiss-based Petromatrix said gasoline has taken the lead of the oil complex due to tightening supply as a result of refinery run cuts and maintenance shutdowns ahead of the summer holiday season.

Gasoline futures and swaps have remained in backwardation for about two weeks, a market structure where prompt contracts are at premiums to longer-dated to reflect tight fundamentals.

Lawrence Eagles of JP Morgan said contango, or the opposite of backwardation, had been narrowing on the crude oil markets, discouraging storage. The bank raised its oil price forecasts on Thursday.

Some traders also bet on long-term views that underinvestment caused by the earlier price plunges would eventually result in a supply shortage.

Some of the costly unconventional oil plans in Canada have been canceled and OPEC producer countries have said they have delayed more than 30 projects.

“Low oil prices caused many investment delays in especially unconventional crudes, which will eventually constrain oil supplies,” an investment banker said, asking not to be named.

“And it is this shortage that in three years time will be felt in the market once the economy has recovered.”

Additional reporting by Veronica Brown, Barbara Lewis and Jane Merriman, editing by William Hardy