Economic fears slow price rise

Sam Fletcher
OGJ Senior Writer

The front–month crude contract jumped 5.5% in the week ended July 9 to $76.09/bbl in the New York market on mixed demand forecasts and an unexpected drop in US inventories. Prices then see-sawed over the next three sessions, topping $77/bbl on July 13 before slipping to $76.01/bbl July 16.

The “upwards progress” in crude prices remains “slow” in the face of fears of a wavering economy, “while improving prompt market fundamentals are being reflected in steady erosion of the price contango,” said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London.

Horsnell reported July 16, “There was one particular piece of notable price action over the past week, with the prompt [North Sea] Brent spread settling in backwardation for 2 consecutive days for the first time since May 2008. The second day was the expiry day for the August contract, which does take a little bit away from the move. However, the trend towards a flatter curve at the front has been clear over the past 2 months. While it has been lower over the past week, the September-October spread has taken over at the front at a relatively mild contango of 37¢/bbl, providing a plausible base for another drift towards backwardation for the expiring contract.”

As for West Texas Intermediate, he said, “The curve has also flattened at the front, with the August-September contango settling below 40¢/bbl yesterday, the first time the front month has done so since March, before the Cushing, Okla.-related blowout of spreads began. It seems that the prompt and physical markets are continuing to price a tightening of the market into spreads, while weak macroeconomic sentiment is continuing to slow upwards progress in levels.”

Demand forecasts
During that same week, the International Energy Agency in Paris and the secretariat of the Organization of Petroleum Exporting Countries separately released their oil forecasts for 2011. “The main forecasts for 2011 have now all been published. The key differences in demand views relate to the degree of seasonality and the prospects for US demand, while the polarization in supply views is largely centered on Russia and Mexico,” Horsnell said, with the IEA taking a different path from the other forecasts in several key areas.

“There are two aspects in which the IEA forecasts diverge the most from other forecasts. First, there is little demand seasonality in the IEA forecasts, particularly in estimates of the second quarter to fourth quarter demand swing. For 2011 the IEA puts that upward swing at just 300,000 b/d. In contrast, our forecast is for a swing at 1.7 million b/d, while the OPEC Secretariat puts it at 2.3 million b/d and the US Energy Information Administration puts it at 900,000 b/d. A similar spread is seen in the 2010 forecasts,” said Horsnell.

The seasonality of demand among members of the Organization for Economic Cooperation and Development is different from that of non-OECD demand, and as the balance between the two has changed so has the seasonality of global demand, he said. But despite that, Horsnell said, “It is still bold for the IEA to forecast virtually no seasonality at all. Indeed, for 2011 it has forecast that the third quarter will be the quarter of highest demand. We have not been able to find another year in which that happened, and so that would be a major departure were the IEA to be proved correct.”

The second main divergence, he said, is in forecasts for North American demand growth in 2011. “The IEA forecast is for a decline of 80,000 b/d, while OPEC sees 240,000 b/d growth, the EIA [also] sees 240,000 b/d growth, and our forecast is for 310,000 b/d growth. The main difference is in the estimates for the US, where across 2010 combined, the cumulative growth estimates are 550,000 b/d (Barclays Capital), 370,000 b/d (EIA), and just 90,000 b/d (IEA). For fourth quarter 2011, the IEA forecast for US demand is 18.71 million b/d, compared to 19.07 million b/d from the EIA, and 19.31 million b/d from Barclays Capital,” said Horsnell.

“For the US to represent the major source of divergence in views is perhaps not a bad thing. With US data generally being the most accurate and timely among global sources, this alignment should at least lead to the swiftest and most conclusive resolution of the divergences in demand views,” he said. Global demand growth forecasts were “fairly similar” from OPEC’s 1.05 million b/d to EIA’s 1.61 million b/d.

(Online July 19, 2010; author’s e-mail: samf@ogjonline.com)

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