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Trends

Europe, US and China – oil prices seem immune

As the debt debacle continues to unfold in the European region, oil traders seem to have (at least shortly this week) adjusted to watching yields of South European countries pass dangerous levels. For now the tight supply situation is more than offsetting bad news on debt. On today’s geopolitical agenda is the deployment of 2,500 US troops to Australia, to reinforce US presence in Asia. This has obviously caused some less than joyful comments from China; however, the statements were not as harsh as expected on such a move. It should therefore have limited effect on oil prices for now, but the situation is worth following, should the political tone tighten.

WTI prepares to return as a benchmark for crude

News of a pipeline sending oil OUT from Cushing, the storing point in Oklahoma for WTI, and to the Gulf refineries hit the market, and sent WTI flying with +3 USD even as Brent was drifting lower. As nothing will happen in the near future – by end 2012 a mere 150,000 bpd, and end 2013 roughly 400,000 bpd, is scheduled to leave Cushing – it very clearly confirms the tight supply situation. The inventory numbers continue to decline, and are at a multiyear low heading into winter season.

Release: EIA oil data (Consensus)

Crude: -1,100,000 barrels (-1,200,000)
Distillates: -2,100,000 barrels (-2,100,000)
Gasoline: 1,000,000 barrels (-700,000)
Refinery utilization: 2.2% (0.5%)

A lot of financial and economic indicators are pointing to lower growth, and thus the assumption that demand for oil should diminish. However, week after week we continue to see draws on oil inventories. A rough estimate, on oil demand, shows that: Chinese consumption will grow with approximately 250,000 barrels per year if they continue to expand at current speed. A slowdown in the Euro zone will mean a slightly lower (200,000-ish) demand for oil.

Recommendation

We recommend clients to adjust risk tactics for a potential move higher. We recommend consumers who have not hedged yet to consider partly hedging at these levels and again if prices drop to 108. As OPEC will likely support prices around and above 100 ( Iran has already proposed cuts in output), we recommend buying on market dips.