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Schork Oil Outlook: Is +$90 Oil Dangerous?

“Oil prices are entering a dangerous zone for the global economy,” said Fatih Birol, the IEA’s chief economist. “The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers.”
Financial Times
January 04, 2011

The International Energy Agency raised its 2011 global crude oil demand forecast for a fourth month as the economic recovery gathers momentum.
Bloomberg
January 18, 2011

Prognostications by Wall Street’s best-and-brightest [sic] aside, the IEA clearly does not think $95 oil, let alone $100 is fundamentally justified this year. We agree, but in fairness to our friends on the Street, the IEA appears to be talking out of both sides of its mouth.

Two weeks ago, the agency warned that +$90 oil could put the global economy in a “dangerous zone.” Be that as it may, this opinion did not preclude them from upping their demand outlook for a fourth straight month. Over that time-step spot Brent crude oil rallied 21 per cent, from $75.47 to $91.32.

So which is it? Either +$90 oil is “dangerous” or it is not.

Over the four months ended December, the structure of the Brent crude oil market has morphed from a steep contango to backwardation in the front of the curve. In other words, the market is apparently growing concerned with the future availability of supply in relation to demand.

A market concerned with $90 would likely not behave this way, regardless of the IEA’s call (on OPEC). As such, analysts at The Schork Reportare advising clients that the $90 handle just might have legs.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.