Commodities | May 20 2009
By Chris Shaw
Oil prices have been on a good run in recent weeks in pushing back up towards the US$60 per barrel level but according to GaveKal research there are reasons to suspect the current rally is about to run out of steam as fundamentals currently don’t support such oil price strength.
As GaveKal notes, a month ago there was as much as 100 million barrels of oil supply floating on tankers and that has increased by at least 30% in recent weeks, pushing global cover of supply levels to 72 days. This is about 7.5% higher than this time a year ago.
This level of supply translates into around six billion barrels of commercial inventory and this represents anything from US$360-$400 billion being tied up in working capital, implying significant incentive to de-stock at present. China will help in this regard having announced increases to its strategic reserves but the numbers suggest even allowing for this and recent OPEC output cuts there is still negative demand in the market of around 2.6 million barrels per day.
This means there is currently a negative carry in terms of holding oil supplies at present, so the researcher argues for the recent gains to be sustained there must first be some de-stocking and then solid evidence of a pick-up in global demand.
Given neither of these are currently in place, GaveKal argues prices are unlikely to remain at current levels, even as we enter the stronger demand period of the US driving season. But as Barclays Capital counters, the recent strength in oil prices is also a reaction to them having fallen too far in recent months as prices were below what the back end of the oil curve suggests are sustainable longer-term averages.
Barclays is of the view that at some point in the future there needs to be a flattening of the oil price curve to fix the discrepancy between weak present demand and expected strong future demand. This is most likely to be achieved by higher prompter prices in the analysts’ view, particularly as doubts remain over the long-term prospects for non-OPEC supply.
According to Barclays in recent weeks prices have been trying to clear the short-term oversupply without tightening longer-term prices too much and this has created a period of rising prices and rising inventory cover at the same time. This represents a simple market fundamental in the group’s view, namely that the dynamics of the market mean prices of US$40-$50 per barrel are far away from equilibrium prices.
In terms of where prices go from here Barclays suggests China is a key as if demand there rises by 180,000 barrels per day, and here risk is to the upside in the group’s view, prices should be able to reach longer-term sustainable levels above US$70 per barrel sooner rather than later.