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Crude oil at a crossroad of inventory and Fed’s QE2
This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog. Oil prices have continued to soften at $82.51 a barrel for November delivery on the NYMEX Friday after a Federal Reserve chairman Ben Bernanke’s speech sparked some uncertainty as to how far the central bank will support the economy. Crude was also weighed down by the weekly inventory report from the U.S. EIA. Despite a week-on-week draw of product and crude inventory, and supply interruptions from Canada due to Enbridge Inc. 670,000 b/d crude pipeline shut-in since Sep. 9, and at the Houston Ship Channel after a barge knocked down a power line, the overall stocks are still well above the five-year average with a year-over-year increase (Fig. 1) Decoupled from equities and metals According to Barclays, over the past month the average price increase of base metals has been 11% compared to only 3% for WTI crude. While this has surprised some traders, it is nevertheless a reflection of diverging market fundamentals, particularly in terms of supply. Transparency kills the mystery So, from that perspective, crude is subject to more volatility due to the weekly inventory report and agencies’ demand/supply forecasts. (Just imagine if there’s a weekly inventory report with similar detail, say for gold, silver and copper.) WTI and Brent disconnect OPEC has voiced its concern about WTI, which culminated in Saudi Aramco’s decision last November to ditch WTI for the Argus Sour Crude Index for its oil for sale in the U.S. market. (Saudi Aramco had priced its U.S. deliveries against WTI since 1994.) And Reuters reported there’s new push from Asia-Pacific − user of a third of global crude − in favor of European Brent to price Southeast Asian crudes. A Reuters survey of traders showed that by 2012, Brent is expected to replace other Asia-Pacific regional benchmarks. This move will further extend Brent’s influence − currently tops WTI and referenced in about 70 percent of global crude supplies − and most likely divert the trading volume from NYMEX into ICE, weakening the U.S.’s status as the world’s leading financial trading hub. Meanwhile, widespread strikes, sparked by the pension reform, at all of France’s 12 refineries have caused supply concerns among oil producers including Total and, if prolonged, could further widen the WTI-Brent spread. (However, it most likely will not have much impact on the U.S. since France is not one of the major importers of crude product from the U.S.) “We’d love to see $100 a barrel” QE2 brings new normal to crude Such policy typically will further weaken the U.S. dollar, while artificially pushing up prices of dollar-denominated commodities such as crude oil, which could lift crude oil into a New Normal crude oil trading range of $80 to $95 a barrel from the current $70 to $85 price band, through the end of the year, along with lots more jabs from OPEC, particularly Hugo Chavez. “Trader’s market” through year end Asia holds the demand card Furthermore, China might just put some extra excitement into the crude market next year as Bloomberg reported that China’s new strategic petroleum reserve storage tanks are expected to come on line next year. This means Beijing could be ready to stockpile strategic petroleum reserves to safeguard the country’s rapidly rising hunger for energy. Source: Dian Chu, Economic Forecasts and Opinions, October 17, 2010. | |||||||||||
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