Oil: global growth continues to support demand
We would not be surprised to see Brent crude trade in the USD105-115 per barrel range for quite a while. Despite the global financial jitters, oil prices have been well supported over the last couple of months.
The removal of Colonel Gadaffi in October has put a lot of focus on the restoration of Libyan oil production. The first numbers show an impressive development. Crude oil supplies rose from a very modest 75 kb/d in September to 350 kb/d in October and the first estimates for November point to 500 kb/d. The International Energy Agency now expects year-end Libyan production of 700 kb/d. Libya had a pre-war capacity of 1.6 mb/d.
The surprisingly fast production recovery in Libya should alleviate the current fears that the upcoming heating season will result in a significant draw in global oil stocks. The important question now is how Saudi Arabia will react to the return of Libyan oil. The latest data do not indicate that the Saudis have lowered production after it was ramped up significantly during the summer. However, we continue to assume that both the Saudis and the Kuwaitis will lower production in 2012 as a response to the higher Libyan production.
Overall, we see USD105-115/bl as fundamentally justified and expect an oil price in this range for the next six months. However, in the second part of 2012 we expect to see a renewed tightening of the market balance and expect prices to close the year at USD120/bl.
However, risks are still primarily on the downside in the short term: demand growth may turn out weaker than we currently project and/or Saudi Arabia could refrain from lowering supplies as we believe it will in Q1 12. Furthermore, the weekly CFTC data indicate that the market has speculative long positions in oil. If these positions are unwound it could temporarily push oil lower.
On the other hand, it should be noted that the market is, in our opinion, pricing in a much more downbeat outlook for the global economy that we do. Hence, if our global growth outlook turns out as we expect, it could spur another round of price surges in oil.
Our oil projection is somewhat above that of the forward curve, which is currently in backwardation. As a result, we advise clients with unhedged 2012 oil expenses to use the current setback to position for higher prices next year. In particular, we advise clients to be aware that the current high negative correlation between EUR/USD and oil prices could break down in 2012. It would remove the often-quoted implicit currency hedge for European oil consumers. Basically, we see a risk that the European debt crisis could push EUR/USD significantly lower, whereas oil prices continue to surge on a global demand recovery in the US and Asia.
We have revised our short-term oil profile down slightly since the latest issue of Commodities Quarterly and we now see Brent averaging USD112/bl in 2012 (previously USD114/bl).
Finally, we have revised up our WTI forecast, as we now forecast a lower spread to Brent going forward. The WTI–Brent spread has narrowed significantly during November. The move had little to do with changes in global supply and demand balances or geopolitics. Instead, it reflects new plans to reconnect landlocked Cushing, Oklahoma, to the Gulf of Mexico. Elevated stocks in Cushing, the delivery point for WTI, have pushed this blend significantly lower compared with similar oil types. The new pipeline should help drain the significant stocks at Cushing and push WTI prices higher compared with other US blends.
We continue to hold the view that Brent is the best proxy for global oil prices and that despite the latest development WTI is dislocated as a global oil price representative.
(Source: Danske Markets, Forex Pros)