Commodities | Jun 29 2009
By Chris Shaw
According to GaveKal Research the steep decline in oil prices late last year as the price tumbled from record levels of near US$150 per barrel achieved one thing in that it set a floor for the price and now the group takes the view current activity suggests the market is now trying to find a ceiling for the market as well.
GaveKal suggests US$72 per barrel may be about as good as it gets for the oil price in the shorter-term as weekly trend following charts are painting a more bearish picture by indicating prices could drop to around US$60 per barrel during the summer and to US$50 per barrel in the December quarter.
This is at odds with a number of forecasts in the market calling for prices to hit US$80 per barrel in coming months, GaveKal countering such views by pointing out global stocks are still ample at present and Chinese demand appears to be overstated.
With respect to the former, the group points out stock levels for crude and middle distillates (used in making diesel) in Europe are very high at present, with more than 40 million barrels of these distillates currently being stored at sea. At the same time stock levels in Singapore are 45% above their mean levels of the past decade and crude days cover in the US is also near its highest point of the past 10 years.
Also, the group notes gasoline supplies are right around their mean levels of recent years and this means any run on perceived tightness in this market is misplaced, while the fact consumption is well down and refinery run rates are also weak suggests the supply/demand equation is tipping further in favour of the former.
In terms of Chinese demand, GaveKal suggests it is important to distinguish between apparent demand and actual consumption, as by confusing the terms it is easy to get a misleading impression of the state of that market. On the group’s numbers, apparent demand is around 8.28 million barrels per day, while actual consumption is closer to 7.77 million barrels per day.
This suggests a little more than 500,000 barrels are moving into storage daily as part of the government’s plan to build up its strategic reserve, which it estimates has increased by more than 134 million barrels since August of last year. At such a rate the strategic reserve should be full by the end of September in the group’s view, meaning demand appears set to fall back to actual consumption levels around that time.
A problem is this slowdown in Chinese demand will also come at a seasonally weak time for global demand and this excess supply is likely to weigh on prices. At the same time GaveKal notes the West Texas Intermediate (WTI) options market call/put ratio is clearly showing traders want to protect against downside rather than upside moves and as this indicator is a good barometer of sentiment the group sees oil price risk resting firmly to the downside at present.