Crude oil futures remain volatile as fears of a recession are mixed with a firm supply and demand balance in the oil market, Goldman Sachs analysts said Friday.
NYMEX September crude oil futures were 6 cents higher at $82.45/barrel in early afternoon US trade, following swings in the equities market. Oil futures opened lower then rebounded, gaining more than $1 to a session high of $83.55/b, but were later teetering near flat.
NYMEX crude's European counterpart, ICE Brent, was outperforming WTI and widening its lead on the US-based barrel.
October Brent was $1.71 higher at $108.69/b by midday, taking the WTI/Brent spread to more than $25/b in intraday trade.
The Goldman analysts, in a weekly report, said the volatility in crude oil prices is seen as investors are "caught between the fear that rising sovereign debt issues and slowing economic growth in both the United States and Europe could portend a slide back into an economic recession and the fact that the oil market supply-demand balance remains firm."
As a result, the analysts said, oil prices plunge on downdrafts of weak economic data, only to rise as oil prices remain too low to balance current supply and demand.
"Net, the market volatility remains, as prices seek to balance a firm current market with the escalating fear of a sharp deterioration in future demand," they said.
A main pressure point of the week was Thursday's weaker-than-expected Federal Reserve Bank of Philadelphia's August business outlook survey, analysts have said, which fell to a negative 30.7 -- the weakest reading since March 2009.
But Goldman analysts also noted that recent US oil demand figures do not support the view that the economy has fallen back into recession.
Over the past three weeks US total petroleum demand averaged 19.8 million b/d, the highest level for this time of year since before the 2008 financial crisis.
Further, the analysts noted, despite the US Strategic Petroleum Reserve adding more than 540,000 b/d to world oil supplies, the impact of the release on US inventories has been muted by low imports, which are 610,000 b/d below last year as the global market remains tight, with Brent and Dubai in backwardation.
"With the LLS-Brent arb shut, US imports will likely stay low after the SPR release, rapidly tightening the US oil market," the analysts noted.
Analysts at Standard & Poor's, which, like Platts, is owned by The McGraw-Hill Companies, noted that responding to fears of recession along with plunging equity prices, the S&P GSCI Energy Index declined 10.68% in August as of the 18th, reversing the year-to-date return into negative territory of 3.41%.
Commodities prices suffered as the S&P 500 Index declined 11.57% for the month to August 18; year-to-date the S&P 500 Index has lost 8.15%.
"Unfortunately potential consumer relief from lower energy prices is not likely to be a factor for quite awhile as the most significant consumer spending and sentiment related commodity, unleaded gas, remains up on the year," the analysts said in a note, referring to the year-to-date gain of 15.52%, as of August 18, in the S&P GSCI Unleaded Gas Index.
Still, analysts said, one key to oil market volatility remains Europe.
"We need to know the extent of the problems in the banks. We need leadership," said Phil Flynn, senior analyst at PFGBest. "Which means we may be in trouble and we are trading more fear than fact. The fact is that this may be forming a major market bottom."
Flynn added that if equities are just testing recent lows then this could be a major long-term equities and oil buy.
"If we take out those lows it is going to be very ugly," he noted.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said leaders from the International Monetary Fund, European Union and European Central Bank are set to visit Greece next week to evaluate the progress toward meeting the conditions to allow the next tranche of the 2010 aid program.
"As we saw previously, this poses event risk as the weaker growth performance [and projected] makes the fiscal targets more difficult to achieve," Chandler said in a note. "In a larger sense, the dispute over Greek collateral points to a still laborious process approval of the second Greek aid package."
