Commodities | Mar 04 2010
By Chris Shaw
In the view of Barclays Capital the global oil market is now close to moving into a new pricing phase, as the pressure for a convincing break above US$80 per barrel has been increasing and the whole trading range appears to be in the process of making its next shift upwards.
Price activity supports this as the oil sector analysts notes the prompt West Texas Intermediate (WTI) contract has traded above US$80 per barrel in each of the past nine trading days, making it 18 days in total so far this year prices have traded above this level against a single day where prices went below US$70 per barrel.
As well, Barclays suggests the geopolitical background to oil is becoming more significant as uncertainty in Nigeria is increasing and Iran's external relations are also being questioned. Neither of these issues are being priced into the market at present in its view, supporting the upside risk for prices.
Another key point in the market is a flattening of the prompt end of the price curve, which leads Barclays to suggest the price contango that has held for around 17 months is on the way out. This reflects the fact global crude inventories have slowly come down, so reducing the need to provide an incentive to shift large amounts of inventory into the next period.
Looking at coming months, Barclays expects the combination of a gradual increase in refinery utilisation and a possible absence of any follow through in higher import levels should begin to reduce US crude inventories relative to their five-year average. Though the analysts also note the normal seasonal peak in absolute crude inventories is not due for another two months.
The market's demand fundamentals seem to support such a shift as Barclays notes the latest weekly data indicate a more positive dynamic for US demand, with distillate demand increasing year-on-year for the first time in 27 months. Barclays' forecast calls for a 150,000 barrel per day increase in overall US demand this year against the Energy Information Administration's call for an increase of 170,000 barrels per day.
Asian demand may prove to be even more important for prices as Barclays notes the latest JODI (Joint Oil Data Initiative) data release implies demand has been growing at better than two million barrels per day in year-on-year terms, leading the analysts to conclude if demand from this region can grow so strongly when prices are in the US$70-$80 per barrel range then prices won't remain in this range much longer.
This stronger demand environment supports the view of Barclays that the recent price range in which benchmark contracts have been set is loosening, to the extent it expects the rough US$70-$80 per barrel range will transition to a US$80-$90 range, with the floor to push up quickly from US$70 to US$75 and then to US$80 per barrel.