SG Commodities Review: Oil

SG Commodities Review: Oil

Michael Wittner
2013.03.20

■ Strong growth in Chinese demand is driving 1.1 Mb/d of global consumption growth this year. Total growth in non-OPEC supply, including OPEC NGLs, comes to 1.4 Mb/d, driven by 1.0 Mb/d growth in US liquids output. Saudi Arabia has been cutting proactively and aggressively to balance the market.

■ The fundamental outlook for this year remains constructive to bullish. The markets are forecast to be nearly balanced, with a looser second quarter and a tighter and more supportive second half. We expect crude prices to continue to be broadly rangebound.

■ ICE Brent crude oil prices are forecast at $112 in 2013, revised up from $110. NYMEX WTI prices are forecast at $96 in 2013, revised down from $97. WTI vs Brent is forecast at -$16.

■ Principal component analysis indicates that fundamentals have become much more important to the oil markets. The proportion of oil price variability explained by fundamentals increased from 35% last summer to 60% currently.

■ Brent is forecast to trade in a $102-$122 range. Factors that set the ceiling for that range include: modest base-case global GDP growth of 3.3%; a forecast 5% global oil burden, which is in the yellow danger zone; and Saudi Arabia, which has the spare capacity and the willingness to use it to increase output to dampen prices.

■ Factors that set the floor for that range include: Saudi Arabia’s willingness to cut output to balance the market and prevent or address oversupply; and geopolitical risk in Iran, Syria, and other hot spots.

■ With US rates expected to rise later this year, what does the return of yield mean for oil prices? Higher rates mean higher oil prices, because higher rates are associated with healthy economic growth.