Commodities | Sep 12 2013
As we have mentioned at the beginning of the report, if the Syrians agree to the initiative offered by the Russians then any oil premium associated with the conflict should erode. We suggest that the Syrian crisis has added about 10% to the price of oil, although different machinations are at work, and we can suggest a correction of about 7% is warranted should we come close to an agreement. However, the price of oil has not just been going up on the back of Syria. In the wings have been other reasons for the price increase: concerns such as high summer demand and the chances of an intense hurricane season have also contributed to the price hike. However, as summer turns to autumn we are entering into a period of low demand. The summer drive time period officially ended on Labor Day and with this we saw a spike in demand and a fall in inventories. This was expected, and as the season is now officially closed expect to see builds emerge as demand tapers off. Seasonally this is a period of low demand, however as of yet this is not reflected in the price. Keep an eye on inventory levels again as they will be key signal for demand and a price fall.
Apart from the summer demand it has been interesting to focus on the hurricane season, or for that matter the lack of a season. Hurricanes in the Gulf of Mexico every year are responsible for a premium build in prices as the chances that a storm cuts or slows production remains real. At the beginning of the season, the NOAA forecast the season would be amongst those of high activity and as such a premium was built into the price. As we enter into the peak period of activity, or mid point for the season, we are still wondering when the season will begin. The potential still remains real as in 2001 the season was late with the first hurricane developing mid September. However, as the season moves on the premium associated with any hurricane activity once again will erode.
So given the easing of geopolitical events, the reduced demand associated with the end of summertime and lacklustre hurricane season (so far) we can suggest the momentum needed to keep prices at current levels is not there and a significant, unwarranted premium is currently overhanging the market. We anticipate that prices should come under pressure. Out WTI target is US103.00 and then by the end of the year, should events pan out the way we think they will, the price would be trading in a range of US85.00 to US95.00.
We are currently short WTI at US108.65 and expect the spread between Brent and WTI to come back in to US2.00.
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