LONDON(Commodity Online): The widening divergence between macro-based and physical-based views of oil continued last week, with renewed hopes of a solution to the Greek debt crisis as European leaders met on the weekend, driving much of the momentum in prices, reported Barclays Capital.

According to bank December WTI ended the week at $87.4/bbl, up by $2.1 on the day, while the equivalent Brent contract lost 20 cents to $109.56/bbl. Underlying oil demand data has continued to hold up reasonably well, with the soft spots now looking brighter. On the other hand, supply dynamics have continued to deteriorate.

Indeed, on Monday morning, the Chinese data confirmed the indications traced out by the preliminary data, with September demand rising y/y by 2.4%, totalling 8.994 mb/d. Gasoline demand came in at another record high of 1.855 mb/d, higher y/y by 11%, while diesel demand remained well-supported at 3.33 mb/d, higher y/y by 3.3%. Jet fuel demand stayed above 400 thousand b/d for the second straight month, coming in at a record high (of 444 thousand b/d), rising y/y by 6.9%.

Residual fuel oil demand, however, declined heavily y/y, by 28.7% to 430 thousand b/d, the lowest reading since October 2009, but should not come as a surprise given the poor margins at tea-pot refineries. This dragged the performance of the main four products lower, which increased by a 146 thousand b/d overall, a slowdown compared to the rebound seen in August. However, to extrapolate the softness in headline Chinese figures purely to a marked slowdown in the economy would be a mistake, in our view, as heavy destocking continues to undermine the strength in underlying consumption.

Indeed, in September, oil product stocks fell by 7.5% m/m, and diesel in particular was lower by 12.7% m/m, pointing to robust oil demand in the country. Undoubtedly, the petrochemical sector has shown signs of a slowdown, with September demand growing by just 2% y/y and warrants a close watch, in our view; however, road and rail freight indications improved sharply in September, with business confidence (PMI) and IP measures growing once again.

Thus, while the destocking trend, which we believe could last through to year end, can mute the reported demand numbers, we do not otherwise expect to see any material slowdown in Chinese underlying consumption, with 2012 likely to see the added boost of a pick up in economic activity and restocking. The fall in Chinese output, on the other hand, was far steeper, declining by 5.2% y/y, the sharpest decline in over a decade.

Barclays reported that Mexican liquids production weakened considerably in September, coming in at 2.863 mb/d, the lowest levels since October 1995. This constituted a y/y decline of 80 thousand b/d, the sharpest decline rate since December 2009, with Crude Oil output accounting for all that decline. In fact, crude output fell below 2.5 mb/d, only for the second time ever by our records dating back to January 1995. Thus, the gap between demand and supply remains large, continuing to put pressure on inventories and spare capacity. Elsewhere, the latest CFTC data showed an increase of 20.7 K lots in net long positions in the NYMEX WTI market taking total positions to 162.1 K lots.

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