CGES August Oil Market View

JAMES LONGMORE | AUGUST 2010 | SOURCE: Monthly Oil Report

The main crude benchmarks, WTI and Brent, have not broken decisively out of the $70-80 range that has prevailed since October ’09, but there have been significant swings in each direction in the past four weeks, with WTI futures climbing above $82/bbl in early August and then recently falling below $72/bbl.

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Our view is that, more than anything else, this reflects the continued uncertainty about the fortunes of the global economy.

Four weeks ago, investors in the financial and commodity markets were still apparently confident that the recovery in OECD countries would be reasonably steady, due to, amongst other things, a stream of decent 2Q10 corporate results.

However since then the prospects for the US, the world’s largest oil consumer, have worsened considerably, with the Federal Reserve deciding to maintain its quantitative easing programme and unemployment remaining stubbornly high at 9.5%. Not surprisingly, consumer confidence and home sales in the States are also faltering and all these factors have resulted in a much more pessimistic global outlook.

What’s more, the oil market’s fundamentals are decidedly bearish. Crude oil stocks in the US, EU 16 and Japan, for instance, have fallen by just 10 mn bbls since the beginning of the second quarter — much less than the usual summer draw — and at the end of July were 14 mn bbls up on the previous year.

In the US at least, there have been further oil product inventory builds since. Thus, though world oil demand is still recovering, there is no shortage of oil. China’s imports also look like waning if September loading schedules from West Africa are anything to go by, while the US hurricane season, billed as a significant upside risk to oil prices earlier this year, has been a non-event so far.

Given we are not yet into September, it is far too early to question seriously the weather forecasters in the US who predicted such an active season, but there is nonetheless an increasing sense that the threat from the mid-Atlantic to the oil industry might have been overestimated.

As a result of these developments, and given that global economic growth will most likely slow in the remainder of 2010, the CGES expects the oil price to weaken somewhat between now and the end of year, declining to an average of $72/bbl in 4Q10. However, assuming the developed world does not fall into a ‘double-dip’ recession, OPEC’s desire to defend an oil price of $70/bbl means any more pronounced price declines remain unlikely.

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