Commodities | Apr 29 2010
By Chris Shaw
Commerzbank has previously pointed out commodity markets are vulnerable to a downside correction because, despite oversupply in various markets, prices have continued to climb.
With Standard & Poors downgrading credit ratings for both Portugal and Greece this proved the last straw for commodity prices in Commerzbank's view, as commodity prices have subsequently come under pressures as investors become more risk averse.
This has pushed down the oil price by almost US$4.00 per barrel in just two trading days, a decline Commerzbank points out has been exacerbated by weak oil data fundamentals. The group notes the American Petroleum Institute's latest inventory statistics for the US showed crude oil stocks rose last week by more than 5.3 million barrels.
Standard Bank has also commented on the US surplus in crude and product stocks, noting at present the surplus is particularly acute in the distillate market. While distillate stocks have declined from 50.5 days last October to 41.6 days now, this remains an elevated level in the bank's view.
At the same time Standard Bank notes capacity utilisation in the US market has risen, with a higher utilisation rate meaning more product is being produced. This implies it will be tough for the US market to record any decline in inventory levels in coming months.
But as Barclays Capital points out, the current data are an indication of what at present is a highly dislocated US market. The inventory overhang is centred solely in the US Midwest, where crude inventories are now 18 million barrels above their five year average. Elsewhere in the US market crude inventories are below their five-year average levels.
Over the past five weeks, Barclays notes, US crude inventories have increased by 6.5 million barrels in absolute terms, which is in line with normal seasonal trends for this time of year. But the five-year average change in inventories for the same period is an increase of 10.9 million barrels, so relative to the seasonal trend inventory levels have in fact come down.
On its numbers, Barclays estimates the overall surplus of inventory above the five-year average in the US has fallen from 21.9 million barrels to 17.5 million barrels. The distortion being created by the higher supplies in the Midwest is affecting prices on the shorter-end of the oil price curve in particular in the group's view, with the curve being both flatter at the back and steeper at the front at present.
While Commerzbank suggests the oil price may fall further short-term as the current macro environment is suggestive of relatively modest demand growth, Barclays sees the demand picture in the US at least as not quite as clear.
Barclays points out US gasoline demand is at present running at its highest level for any April, with year-on-year demand growth running at around 3.4%. On the flip side, distillate demand for April is around 15.7% below its April 2007 level.
In terms of oil price expectations, Standard Bank expects the market will remain relatively range bound. The bank sees front month prices averaging US$84 per barrel in the June quarter as prices above this level would need to be accompanied by substantial US dollar weakness.
Standard Bank doesn't expect this will be the case this quarter given the economic issues in Europe at present and the potential for this to put pressure on the euro relative to the greenback.