Schork Oil Outlook: Fed vs OPEC—Who Drives Oil Now?

Is anyone at the Fed listening?

As OPEC prepares to meet tomorrow (Thursday) in Vienna, the group expects demand for its crude oil to weaken. According to yesterday’s release of their monthly market report, OPEC estimates demand for its oil at 28.6 MMbbl/d in 2010. That represents a downward revision of 0.1 MMbbl/d from last month’s report and a decline of 0.3 MMbbl/d from 2009. Demand for OPEC’s oil in 2011 is expected to average 28.8 MMbbl/d.

OPEC revised up its estimate of overall global demand growth in 2010 and 2011 to 1.13 and 1.05 MMbbl/d respectively. As such, demand is forecast at 85.59 MMbbl/d in 2010 and 86.64 MMbbl/d in 2011. Growth in non-OPEC supplies is expected to sop up incremental demand.

To wit, supply of oil outside of the Organization is forecast to grow by 1.01 MMbbl/d to 52.23 MMbbl/d. That is the largest increase since 2002.

Meanwhile, total OPEC estimated production in September was 29.08 MMbbl/d or 26.67 MMbbl/d (excl. Iraq). As such, the Group’s production was 1.82 MMbbl/d (+7.3%) above its production ceiling and 0.48 MMbbl/d (+1.7%) above its demand estimate. However, with a tenuous economic recovery in the West, perception in the market holds that OPEC will keep production quotas unchanged.

On its face it seems reasonable that OPEC does not want to undermine the nascent recovery. The Group noted that the growth of more than 1.0 MMbbl/d of oil demand in the first half of this year was predicated on government stimulus. However, as analyzed in today’s issue of The Schork Report, “… the depletion of government funds will leave oil demand forecasts for the second half a little below previously anticipated growth, assuming no additional government support”.

Dovish market assumptions regarding OPEC notwithstanding, volatility in the oil market has increased by 233 bps over the last five sessions and now stands at a four-week high, 33.3%. An increase in volatility ahead of an OPEC meeting is not unreasonable. After all, OPEC has been known to zig when everyone was expecting them to zag.

In this vein, oil ministers cannot be pleased with a freefalling U.S. dollar. When OPEC last met in March the dollar was trading around €0.7319. The greenback then went on a tear, peaking in early June at €0.8420. However, since then it has crashed by 15% and is now trading at eight-month lows, €0.7187 as of the latest mark.

Bottom line, with the dollar 1.8% weaker than when OPEC last met, the group’s perma-hawks (Iran, Venezuela et al.) will undoubtedly cluck like starved pullets for a quota reduction. Since March the (120-day) correlation coefficient between oil and the dollar has morphed from a positive relationship of 0.548 (oil prices and the value of the dollar moved in the same direction) to negative correlation of 0.659 today.

Thus, as goes the dollar so shall go the price of oil… is anyone at the Fed listening?


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.