OGJ Senior Writer
Despite breaking above $80/bbl, oil price movements mostly traded sideways in late October. In the last trading week that ended Oct. 29, Walter de Wet at Standard New York Securities Inc., the Standard Bank Group, reported net gains of 19¢/bbl for front-month North Sea Brent crude and 26¢/bbl for front-month West Texas Intermediate.
Volatility was subdued with sentiment still focused on inventory overhangs and demand-side risks, “even though both perceptions appear misplaced to us,” said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London. “We expect prices to break out of this monotonous rhythm, as the market takes a look at the fundamentals with a fresh and more positive eye. However, it might not be until the New Year that the full scale of this renewed vigor emerges,” he said.
On Oct. 28, Horsnell reported, “On each of the past nine trading days, Brent has passed through $83/bbl at least once. The prompt WTI contract has shown no more imagination, indeed it has traded through $82/bbl on 14 of the past 15 trading days. Dull, dull, dull.”
To offset boredom as “Brent keeps trading at $83 and WTI trades at $82,” Horsnell suggests a game of “oil analyst bingo,” scoring points each time a market analyst utters any of these stock phrases: “slowing Chinese demand,” “huge inventory surplus,” “end-of-year destocking event,” “correlation with Standard & Poor’s 500,” “correlation with dollar,” “weak US demand,” “driven by expectations of QE2 [the Federal Reserve Bank’s second wave of quantitative easing],” “rampant speculation,” and finally “weakening fundamentals.”
Horsnell claims, “All of those concepts are either completely false or not particularly illuminating, but they do seem to make up enough of the flow of analysis to allow each round of oil analyst bingo to keep bouncing along at a reasonable pace.”
Following a brief foray above $80/bbl, the average price of the Organization of Petroleum Producing Countries’ basket of benchmark crudes moved “a dollar or two lower” and has remained “extremely stable” at those levels, Horsnell said.
Front-month Brent crude averaged above $83.50/bbl in October, one of its best performances this year. “Volatility in the oil market remains subdued, with implied volatility traversing the mid 20-30% range for most of the year, excluding the fleeting passage towards 50% in April,” Horsnell said.
Global oil demand fundamentals continue to improve, with another upside surprise from China as preliminary trade data pegged China's crude oil imports at a record high for September. Horsnell placed Chinese oil demand for the month at 8.78 million b/d, the second strongest demand level ever, despite widespread market concern about an imminent slowdown. While the annual rate of growth in September was just 600,000 b/d, bringing the third quarter demand increase to 500,000 b/d, he said, “The slowing year-over-year growth is fully consistent with rising base effects last year due to the start-up of a significant tranche of petrochemical capacity, rather than indicating any falling away of demand.”
He reported, “The demand gain for the year-to-date is now 840,000 b/d. To put that number in context, at the very start of 2010, sources…provided a range of forecasts for Chinese demand growth for the year that stood between 310,000 b/d to 400,000 b/d. The current range of estimates runs from 460,000 b/d (OPEC Secretariat) to 790,000 b/d (Barclays Capital).”
Since the start of this year, estimates by the US Energy Information Administration, the International Energy Agency in Paris, and Barclays Capital for Chinese oil demand growth have all been revised higher “to the tune of 400,000 b/d,” Horsnell said.
So far, Chinese oil demand in the second half is running higher than 6% from a year ago, with jet fuel demand rising to a record high, turning China into a net importer for jet fuel for the first time since February, and diesel demand climbed to its second highest level.
(Online Nov. 1, 2010; author’s e-mail: email@example.com)