A heightening of cold weather in the US combined with an upward revision from the IEA of world demand has offered oil prices some respite.  The IEA has revised up its forecast for world demand by 170K barrel a day, with the estimated increase in demand being driven entirely by countries outside the OECD.  While an increase in demand is clearly a  positive factor for any commodity, the long-term impact on oil prices must be considered in the context of the oversupply that has hung over the market for months.  Until oil inventories return to seasonally normal levels than it can be assumed that the rally in oil last year overcompensated for the recovery in world demand this year; this implies that the good news from the IEA is already in the price.  Looking forward demand is vulnerable to an increase in policy tightening in China, though with OCED countries still accounting for the majority of overall demand oil prices are potentially more vulnerable on poor economic data from the developed world.  

This week's release of US retail sales data will provide a decent clue to the relative strength of the US consumer.  Data to date still suggests that final demand in the US is weak; economic recovery to date has been a function of fiscal support.  Almost all stock markets have notched up losses on a year to date basis so far in 2010 suggesting that in general risk has been taken off the table this year as the market reins back the optimism which was evident in the markets going into yearend 2009.  Eurozone Q4 GDP data are also due on Friday, weak French production data in December combined with a warning from the German statistical agency that the German recovery slowed significantly in Q4 do not bode well.  Weak Q4 growth data in the Eurozone could add to the EUR's present woes.  While the EUR has recovered from the month's lows on the news of an EU support package for Greece, the fiscal issues that have been uncovered within EMU suggest that ministers may have to embark on a process to develop new controls.  This process could take years and suggests that the EUR could continue its downward adjustment vs the USD this year.  A stronger USD this year will weigh on oil prices.  Even taking the new estimates of the IEA into account, we continue to see risk of a fall in oil prices to $60 in the months head.  

Last week, the Brent futures contract finally broke below the technically significant $71 /barrel level which weakened its outlook and increased the risk of a move towards the $65 / barrel level.  Prices subsequently recovered though daily MACD is still bias lower.  Above a cluster of daily smas near $75 /barrel would strengthen the outlook for Brent futures.  

Jane Foley
Research Director
+44 207 398 5024