The loaning of the green

Sam Fletcher
OGJ Senior Writer

The December crude contract jumped 1.8% to $81.85/bbl Nov. 18 in New York on the imminent bailout of the Irish banking system by the European Union and the International Monetary Fund. But the contract dipped Nov. 19, finishing down $3.37 for the week at $81.51/bbl. The January IPE contract for North Sea Brent crude lost $2 for the week to $84.34/bbl.

Crude took a beating over the five trading sessions that week, “falling 4% after China raised its bank reserve requirements for the second time in 2 weeks in order to control inflation,” said Houston analysts at Raymond James & Associates Inc. “Separately, the European sovereign debt crisis hung over markets amid escalating concerns about Ireland's solvency,” they said. However, over the Nov. 20-21 weekend, Ireland gave in to international pressure and applied for a bailout, spurring optimism among some its rescue will prevent contagion across European debt markets.

It’s not surprising the oil price rally derailed, “given the latest bout in the long-running saga (or perhaps five-act tragedy) of debt woes in the EU,” said analysts at KBC Energy Economics, a division KBC Advanced Technologies PLC in Surrey, UK.

“The trouble with the strategy on European debt is, where will it all end?” they asked “Once Ireland is out of intensive care, the market is bound to start looking for another accident, and there is a queue of them waiting to happen in Europe—Portugal being the most prominent of the potential victims, even though the country insists its situation is quite different from that of Greece or Ireland.”

At Standard New York Securities Inc., James Zhang said, “As the eurozone debt issues settle on the back of Ireland bailout ahead of the US Thanksgiving holiday on Nov. 25, we expect the energy market to remain in consolidation mode. Further ahead, we see supply and demand fundamentals to improve at a very slow pace and market direction generally directed by excess dollar liquidity and downward risk of Chinese monetary tightening.”

In recent weeks “the weakest performance out of the main indices was coming out of China,” Olivier Jakob Nov. 22 at Petromatrix, Zug, Switzerland. “With the fear of interest rate hikes in China to curb inflation, the Shanghai Composite Index has been a key sentiment driver over the last 10 days for global commodities.”

Is demand sustainable?
Analysts at Barclays Capital Commodities Research see “robust and optimistic global oil demand data” and “signs of a better sense of Organization for Economic Cooperation and Development demand recovery complementing the strong growth in non-OECD oil demand,” resulting in the rapid draw of excess fuel inventories. Persistent upward revisions have global oil demand growth set to breach 2 million b/d for only the second time in over 30 years, with market conditions at their tightest in over 2 years. “With removal of large barrels of floating inventory, the upside surprise in demand is being entirely reflected in the rapid erosion in onshore stocks. The inventory overhang in the OECD outside the US has fallen well below the 5-year average, while the drawdown in US inventories, although slow in commencing, is flourishing with full vigor,” they said.

At the Centre for Global Energy Studies (CGES), London, analysts agree there was unprecedented surge in reported global oil demand in the third quarter after 10 consecutive quarters of global stock builds. But demand is measured at the refinery gate and not at the point of end use, “so what we have actually seen is a big jump in deliveries of finished products from refineries, not necessarily an equally big jump in the final consumption of those products,” they said.

CGES sees little fundamental support for higher prices. “Once downstream inventories have been replenished, oil demand growth will return to a rate determined by actual consumption, and this continues to look subdued among the developed economies, which are still facing a very uncertain economic outlook,” they said.

(Online Nov. 22, 2010; author’s e-mail: samf@ogjonline.com)

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