OPEC oil market report tells quick recovery is unrealistic

With the world economy on the path of recovery, OPEC in its September, 2009, “Monthly Oil Market Report,” observes that the rush in equity markets in some part of the world may be unrealistic.

The report stated that in developed and developing countries, equity markets across the globe have rallied strongly because credit markets in those countries showed stability. Real economy indicators such as manufacturing and housing have also improved, and both consumer and business confidence have partly recovered from the recent downturn.

Also, data for the second quarter already indicates that the Gross Domestic Product (GDP) in the Organisation for Economic Cooperation and Development (OECD) region has reached the bottom and positive growth was seen in the third quarter.

Japan, Germany, France, among others, the report indicated, posted positive growth in the second quarter. Growth was also positive in major emerging Asian economies. Altogether, these signals indicate that the recession is moving toward recovery.

On the contrary, the equity market in Nigeria has not experienced any rallies because investors’ confidence in the market has been eroded due to the global economy crisis and the new reform, which the nation’s Central Bank has embarked upon.

Despite these improvements, OPEC warned that “the rally in equity markets seems to be factoring in higher growth than the real economy can support”.

“The real economy continues to face several challenges. US housing problems, despite some stabilisation in sales and prices, are far from resolved. Unemployment is expected to rise further and banks, businesses and consumers, at least in the developed world, will remain constrained as they struggle to repair damaged balance sheets. On the whole, given OECD weakness, the world economy remains fragile and recovery will be slow and gradual,” the report noted.

It is expected that stronger growth in developing countries and China will support world growth but may not be sufficient to prevent below-trend growth rates in the next two years. This is because “public finances are also being strained by the huge fiscal, monetary and financial sector support that helped to cushion the economic downturn and prevent a financial system collapse”.

Meanwhile, policy-makers during the recent G-20 Finance Ministers’ meeting recognised that it is still premature to withdraw the support given to some countries until the recovery is more self-sustaining. They also agreed on the need to develop cooperative and coordinated exit strategies in order to avoid undermining the growing recovery.

Accordingly, the organisation revised its forecast for the world economic growth (in 2009) from -1.4 per cent to -1.2 per cent; representing 0.2 percentage points up, while the forecast for 2010 was revised up by 0.1 percentage point to 2.5 per cent. “These adjustments were mainly due to an improvement in the global growth numbers for the second quarter supported by the fiscal and monetary stimulus,” it explained.

However, given the fragile state of the global economic recovery and despite persistent challenges from weak fundamentals, OPEC has agreed to closely monitor the supply and demand for its oil products and will reassess the market situation at its 155th Extraordinary Meeting in Luanda, Angola, on December 22.

Tags:  oil market report, OPEC