Our analyses of the technical and fundamental indicators of the oil market suggest that oil prices are unlikely to fall below $40 per barrel. Although the rally in oil in not upon us, in our view, we have seen the bottom in the oil market.
We believe that the worst in the oil market is behind us for the following reasons:
1)      West Texas Intermediate (WTI) crude oil (produced in West Texas, USA) is again trading at a premium to Brent crude oil (produced by the Norwegians and British in the North Sea) after months of unreasonable discount. The return of this historical relationship (mostly due to the superior quality of WTI) is an early indication that supply gluts are clearing and health is returning to the crude oil market.
2)      Contango in crude oil futures market has narrowed considerably from historically high levels of early Feb 2009. This too indicates a renewed demand for crude oil. Contango refers to the price difference between current and the extant futures contracts, where nearby deliveries are cheaper than deliveries in later months. The latter-month premia mostly reflect the cost of carrying the commodity, e.g., financing, storage and insurance. The existence of a contango implies there's something to carry, which is an unlikely occurrence in a tight market.
3)      OPEC is continuing to surprise the market with its recent discipline. The cartel has made significant progress in meeting its downsized quota approved in 4Q 2008. The quota called for 4.2 million-barrel (around 0.6 million tons) cut in cartel’s daily output from Sep 2008 production level of 29.5 million barrels (around 4.0 million tons) per day.
4)      From a technical stand-point, the downtrend line extending back to mid-July 2008 (when oil prices peaked at $147 per barrel) has been broken in Jan 2009 to the upside and has served as support since then. The line sets the floor under oil prices at around $40 per barrel.
5)      Quantitative easing (flooding the system with liquidity) by the Federal Reserve is weakening the US dollar and putting a floor under commodities which are priced in dollars. The recent spike in oil prices has been aided by the Fed’s plan to purchase US Treasury bonds.

“Although we argue that the bottom in oil prices is in place, we also believe that the recent rally in oil prices is unsustainable” said Serhiy Syvoplyas, managing partner of Delphi Capital. Such reasons are as follows:

1. Falling oil prices usually translate into lower gasoline prices which allow consumers to save on gasoline and have more money available for other purchases. Therefore, low oil price is similar in its impact to fiscal stimulus and is a positive for the ailing global economy. Given the persisting weakness in the world economy, increasing unemployment, falling output and consumer retrenchment, rising oil prices would be unsustainable at this point in the economic cycle.

2)      Oil prices have historically demonstrated close correlation with global leading economic indexes and the US Purchasing Managers Index published by the Institute for Supply Management. All of these indicators are continuing to weaken. Unless these indicators bottom out and show strength, oil price rally is unlikely.
Exchange Traded Funds (ETF) and futures are the best ways to play the crude oil market. Although quite popular abroad, these financial instruments are not yet available to Ukrainian investors.

For Ukraine, such trend of oil prices mean that in 2009 there will be a period of relatively low prices (compared to last year) for oil and oil products. That will be a perfect time for introducing regulatory changes in oil and natural gas markets, stimulating local and international investments into this sector. Taking into account time lag for explorations works, which will enable the country to extract more domestic hydrocarbons when prices go up in the future. Examples of such projects may be Vanco project at Prikerchenska area of Black sea shelf and creation of joint ventures between Naftogas Ukrainy and international investors with necessary technology and financial recourses for extraction natural gas in Poltava region. Another beneficial for Ukraine use of low oil prices period will be securing diversified routes of oil deliveries into the country. In practice it means launch of Odesa-Brody oil pipeline in its original north direction, using Caspian oil.