CGES Monthly Oil Market View

JAMES LONGMORE | JULY 2010 | SOURCE: Monthly Oil Report

The past month held few surprises as far as the oil price was concerned, with the main benchmarks continuing to trade within the $70-80/bbl corridor that has been a feature of the second quarter of 2010.

Given that crude oil and oil product stock levels remain close to record highs and that the market is fearful of OPEC’s reaction should prices fall much below $70/bbl, it is not surprising that this equilibrium is prevailing.

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However, there have been important recent developments in the industry. BP has now succeeded in stopping the flow of oil into the Gulf of Mexico, roughly three months after the blowout at its Macondo prospect on April 20th.

BP’s board clearly feels a new chapter has begun, as demonstrated by its decision to remove CEO Tony Hayward, who will be replaced by Mississippi-raised Bob Dudley in October. Assuming the drilling of the relief wells goes to plan, the plugging of the leak should allow a more measured discussion about the causes of the disaster and the legislative repercussions.

Our view is that while deepwater drilling will become more expensive in the Gulf in the future, it should still remain profitable, even if the risk of another similar incident puts off some potential investors.

Elsewhere, Transneft also began testing Russia’s first oil pipeline export route to China. This spur off the East Siberia-Pacific Ocean oil pipeline should begin delivering 300,000 bpd across the border early next year to CNPC, and its significance lies in the fact that it will help further reduce China’s dependence on long-term contracts and shipments from the Middle East, while also easing Russia’s reliance on the European market and transit countries to the west.

The oil price could be considerably more volatile in the coming four weeks if preliminary US predictions of an active hurricane season in the Gulf of Mexico are proved correct. Although September is typically the most active period, recently the devastating Hurricanes Katrina (2005) and Gustav (2008) arrived at the back end of August and a repeat cannot be ruled out, a development which could push WTI prices well above $80/bbl.

However, excepting this known unknown, we do not think there will be much reason for the oil price to break out of its current trading range for long. The one potential development that we believe could exert a bit of downward pressure on the oil market is the volume of China’s crude oil imports, which could well fall in July from the 5.4 mbpd reported for June.