Wednesday, December 08, 2010

Black Gold @ US$90-plus! No, Surely? Is it?

“You can’t be serious,” was often the trademark thunder of American tennis legend John McEnroe when an umpiring decision went against him. In a different context some commodities analysts might be thundering exactly the same or maybe not. In any case, deep down Mr. McEnroe knew the umpire was being serious.

On a not so sunny Tuesday afternoon in London, ICE Futures Europe recorded Brent crude oil spot price per barrel at US$91.32. This morning the forward month Brent futures contract was trading around US$90.80 to US$91.00. While perhaps this does not beggar belief, it certainly is a bit strange shall we say. I mean just days ago there was the Irish overhang and rebalancing in China and all the rest of it – yet here we are. Société Générale’s Global Heal of Oil research Mike Wittner believes the fundamental goalposts may have shifted a bit.

In a recent note to clients, he opines that underpinned by QE2, the expected environment of low interest rates and high liquidity next year should encourage investors to move into risky assets, including oil. “With downward pressure on the US dollar and upward pressure on inflation expectations, the impact should therefore be bullish for crude oil prices,” he adds.

The global oil demand growth for this year has been revised up sharply to 2.4 Mb/d from 1.8 Mb/d previously by SGCIB, mainly due to an unexpected surge in Q3 2010 OECD demand. The demand growth for next year has also been increased, to 1.6 Mb/d from 1.4 Mb/d previously (although still, as expected, driven entirely by emerging markets).

What about the price? Wittner says (note the last bit), “For 2011, we forecast front-month ICE Brent crude oil near US$93/bbl, revised up by $8 from $85 previously. With continued low refinery utilisation rates, margins are still expected to be mediocre next year, broadly similar to this year. The oil complex in 2011 should again be mainly led by crude, not products.”

YooHoo – see that – “mainly led by crude, not products.” Furthermore, SGCIB believes crude price should average US$95 in H2 2011, in a $90-100 range. Well there you have it and it is a solid argument that low interest rates and high liquidity environment is bullish for oil.

Elsewhere, a report published this morning on Asian refining by ratings agency Moody’s backs up the findings of my report on refinery infrastructure for Infrastructure Journal. While refinery assets are rather unloved elsewhere owing to poor margins, both the ratings agency and the Oilholic believe Asia is a different story[1].

Renee Lam, Moody's Vice President and Senior Analyst, notes: “Continued demand growth in China and India in the short to medium term will be positive for players in the region serving the intra-Asia markets. Given the stabilization of refining margins over the next 12 to 18 months, a further significant deterioration of credit metrics for the sector is not expected.”

While Moody's does not foresee a significant restoration of companies' balance-sheet strength in the near term, they are still performing (and investing in infrastructure) better than their western, especially US counterparts.

[1] Oil Refinery Infra Outlook 2011: An Unloved Energy Asset By Gaurav Sharma, Infrastructure Journal, Nov 10, 2010 (Blog regarding some of the basic findings and my discussion on CNBC Europe about it available here.)

© Gaurav Sharma 2010. Graphic: ICE Brent Futures chart as downloaded at stated time © Digital Look / BBC, Photo: Oil Refinery © Shell

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