Markets
The strength in crude oil, particularly during the first quarter, finally seems to have broken with the macro oil-(weighted basket) currency trade. Even before the Greek/PIGS debt crisis, the correlation was breaking down, possibly with increasing signs of global economic recovery. Perhaps this is in anticipation of the real currency winner against both USD and the (primarily) Euro basket — the Chinese Yuan — in a global recovery. Fundamentally, oil supply does not seem to be a problem, with continued slippage in OPEC compliance (now down to 54% from 80% early last year), and widening quality differentials, a sign of rising availability of lower quality grades. There is some concern that recent product exports from China (including highly prized diesel/fuel oil) is a sign that the chief engine of demand growth has, for now, stalled. This is not a universal view, however, and the Chinese data is/has always been opaque. No change in my/our view that gradually higher demand, coupled with a doughnut hole in nonOPEC supply growth, will lead to tightness and much higher crude prices during 2010 and, moreso, 2011. Meanwhile, reports out of the Middle East are that many mothballed expansion projects in the region are back in ‘play,’ although these are large, and multiyear, i.e. will not solve much of any supply shortfall before 2013-14.