LONDON (Commodity Online): Oil prices edged higher in thin trading on Thursday due to the US Thanksgiving holiday, with January Brent settling 76 cents higher at $107.78/bbl. The continuing weakening of sentiment has put pressure on prices this week, with debt fears on both sides of the Atlantic key in a mounting loss of faith in economic, and hence demand, prospects. The truth, though, is that much has changed. Brinkmanship between the European policy makers continues as does the pressure on many European governments to deliver fiscal and economic reform, said Barclays in a research note.
According to Barclays, Economic data in the US are actually a lot perkier, and while Chinese data have been more mixed than outright strong, indications are that the Chinese government is embarking on a slightly looser monetary policy stance, which would once again bring growth, rather than inflation, as the key policy metric into focus. As our economists note in the Global Economics Weekly, 18 November 2011, “the halting progress towards a solution to the eurozone crisis has contributed to weak euro area aggregate demand and has infected growth and sentiment in other economies to varying degrees.
Although the US and China remain in above-trend growth environments and global auto sales data support our view that a global industrial recession can be averted, policymakers view risks as skewed to the downside, and central banks globally are continuing to focus on growth over inflation.” As we highlighted in our monthly Oil Sketches released this morning, for the oil market, the intensification of the euro area sovereign debt crisis, the return of Libyan, Nigerian and North Sea volumes and slower demand growth have all created a mesh of bearish sentiment.
While the availability of an additional 200-250 thousand b/d of Libyan crude does make a difference at the margin, OPEC output has fallen back despite the return of Libyan volumes, with reductions in Saudi Arabian output the key contributory factor. Concerns about the health of oil demand are also rife, but the data have shown no signs of degenerating yet. So Q4 thus far feels softer primarily due to the extreme tightness in Q3. In absolute levels, the balances look healthier, but no more than our forecasts already implied.
Total supply, despite the return of Libya and better Nigerian output, is still set to fall short of demand, despite the slowdown in growth rates, making it the eighth straight quarter of stock draw. The fact is that we are still in stock-draw mode, although the pace of stock draws has eased off. The key here is that the starting point of the market is one of acute deficit. Inventories at the end of Q3 were some 25 mb below seasonal averages, and that gap extended to over 50 mb by October.
Thus, while undoubtedly this market feels softer relative to previous quarters, it cannot be characterised as a ‘soft market’. Moreover, geopolitical risks continue to rise, with the Iranian situation in particular continuing to escalate. Reuters reported that France considered imposing a unilateral sanction on Iranian crude imports, with the aim of convincing western allies to impose similar bans.
While the French backtracked later saying that it would act only in accordance with broader EU sanctions, Italy’s oil industry body stated that sanctions on Iranian crude were inevitable. Italy relies on Iran for around 13% of its Crude Oil needs, equivalent to 200 thousand b/d. In fact, Italy’s foreign ministry said this morning that sanctions should be tightened and it was seeking to persuade the country’s companies to diversify away from Iranian oil. Spain is the second largest
European buyer of Iranian crude at around 140 thousand b/d, while French volumes are a lot smaller. The largest buyers of Iranian crude, of course, are China, Japan, India and South Korea. Given the mounting sanctions, we continue to believe that the Iranian oil sector, already struggling with high decline rates and product shortages, will face further headwinds, resulting in production shortfalls in the coming months.
