Even though pessimism abounds in the broader global economic picture, oil prices have rallied in the last week after hitting yearly lows. The ICE Brent crude, which is fast becoming the benchmark crude, rallied almost $10 a barrel from its lows, settling at close to $110 a barrel yesterday.
There has been a slew of market data and key policy decisions that have come out in the last week, including softer GDP figures in the US. Much of it has not been supportive to prices and has meant volatility in the markets.
Pundits largely agree that the market is trading on fear but they question the nature of this fear - is it one of sustained weakness or one of global economic apocalypse?
They point out that while the reaction has been one of utter mistrust in the strength and ability of the global economic system, the underlying factors contributing to the jitters should be considered mere humps and not severe breakdowns.
"It appears to us that what most traders have actually been reacting to is something less apocalyptic - a fear of a slowdown, a disappointment, but not a reversal in growth," analysts at Barclays Capital said.
"That makes a huge difference in terms of the correct pricing [of] that fear."
Broadly, analysts still expect oil prices to remain strong, underpinned more by fundamental strength rather than a reign of fear.
Much has been written about Libyan supply disruption and the re-emergence of Saudi Arabia as the swing supplier, with the ability and willingness to alter production quota to impact prices, a power being seen for the first time since the 1970s oil shock.
Equally, a lot has been written about OECD demand or more specifically softer demand growth in US and key European countries. But what has gotten little notice is China, which is emerging as a "potential counterweight".
"Given the strength and scale of demand swings that can be generated by China, the impact on global balances can be immense, and indeed increasingly at the margin more than the wings generated by the US," according to Barclays research.
Barclays highlights the Chinese oil demand data from last month which, while not registering a significant month-on-month increase, is still up 7.4% from same time last year and now at 9 million barrels per day.
Similarly, in the year-to-date, Chinese oil demand is year-on-year higher by 9%, or 750,000bpd.
What has also gone relatively unnoticed is China's oil production, which has also seen a fair bit of decline in growth. Crude oil production was up by a mere 0.4% to 4.1MMbpd, which is the lowest since November 2009 when production actually declined for the first time.
"While China was a strong source of non-OPEC supply growth last year, 2011 has seen Chinese oil output growth more than halved to just 3.2 per cent … as it continues to battle with problems at its offshore oilfields," Barclays said.
"Although the sovereign crisis and associated risk-off trade have hit energy markets, we do not see sharply weaker energy fundamentals - whether in commodities, credit or equities."
