Fundamentals point to weaker crude but supply fears persist: CGES

London (Platts)--21Aug2006

Oil market fundamentals point to a weaker crude market but continuing
worries about potential supply disruptions mean that oil prices are being
pulled in two different directions by a "tug-of-war between real barrels and
anxieties," the Centre for Global Energy Studies said Monday.
On the one hand, the driving season is drawing to a close and stocks are
building, the CGES said in its Monthly Oil report. But on the other, it said,
Nigerian unrest continues, Iraq remains "chaotic," and Iran continues to defy
the major world powers over its nuclear enrichment program.
"These two forces should offset each other, keeping the oil price within
a narrow range over the next six months at least, but the uncertainties are
great and the slightest deterioration in the fragile geopolitical scene could
send the price soaring once again," the CGES said.
Nevertheless, "an easing of geopolitical tensions, coupled with rising
inventory cover, would cause a major price correction," the CGES said, noting
a slowing US economy and flat oil demand in the world's biggest consuming
country.
Rising interest rates in response to rising inflation, triggered in part
by high oil prices, will weaken global economic growth, the CGES said. It
acknowledged that apparent oil demand was growing in China but suggested that
half of this growth may be due to restocking after last year's heavy stock
drawdowns.
The CGES also forecast "much healthier" supply growth from non-OPEC
producers -- 1.1 million b/d -- which meant a 700,000 b/d reduction in demand
for OPEC oil this year when last year's 500,000 b/d global stockbuild is taken
into account.
Fears about supply, meanwhile, "are channeled mainly into the futures
market, where the non-commercials on [the New York Mercantile Exchange] have
been net long since the end of March," the CGES said.
"An easing of tensions could cause a sell-off in the futures markets
without hedgers like airlines and utilities stepping in to take the slack, in
which case a combination of rising inventories and falling futures prices
would cause a major oil price correction," the CGES said. However, if "anxiety
levels" remain high, it added, the industry will want to retain is stocks.

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