Collapse in oil prices pauses, but not over yet warn analysts
China (Platts) -- August 18 - 22, 2008
By reporters at Platts, the energy information division of the McGraw-Hill Companies. For more information about Platts' information products in China, contact Platts at china@platts.com, or call its representative office in Guangzhou at (+86) 20 2881 6588.
Oil prices stopped falling last week, but the balance of evidence to hand suggested that the bearish run on the market is not quite over yet, according to most analyst reports looking at the weeks ahead.
Crude oil started flowing again last week to the Turkish port of Ceyhan through the 1 million barrels per day Baku-Tbilisi-Ceyhan pipeline after successful testing of the pipeline. The BTC line, which was closed for just over two weeks following an explosion August 5, started flow testing August 20.
That development, along with news that Asian refining continues at high levels and Chinese demand has already started to slow for products like jet fuel, looks likely to keep the oil market under pressure in the week ahead.
Signs that the US dollar could continue to strengthen against Europe's euro and other major currencies also suggest pressure to come on oil, as the product gets more expensive for importing countries paying in currencies other than the US dollar.
Crude oil futures ended last week up 1% or so in value on the New York Mercantile Exchange and ICE Futures, at $114.59 per barrel and $113.92 per barrel respectively.
The jump in oil futures was founded on lingering concerns about tensions between Russia and the US over recent fighting in Georgia, and separately concern about whether the coming winter might bring a squeeze on heating fuels.
Middle distillates like gasoil and jet were the source of most strength that was on display in oil -- as has been the case for almost all of 2008. Gasoil, which has been particularly hard hit in recent weeks by news that Reliance Industries giant new oil new refinery in India will soon start production, rebounded last week to close at $1,030.50 per tonne, a gain of 4% over the week before.
The re-emergence of middle distillates as a price-setter suggests the pace of demand growth globally is not likely to slow and stocks could be on the lean side going into the winter peak heating season in the northern hemisphere.
The weekly US oil stocks data, which showed total inventories continued their tightening trend despite slower demand growth. Energy Information Administration data showed total product stocks only fell 1 million barrels to 685.3 million barrels, but inventories were 6.969 million barrels below the five-year average.
Analysts not convinced that bear run over yet
Most analysts seemed unconvinced that the fall in oil prices since July is really over yet.
"Ultimately, the Russia tensions will subside, the dollar will strengthen again on negative economic indicators overseas and the market will again zero in on demand deterioration as a primary trading theme," energy consultant Jim Ritterbusch said in a report.
Demand destruction in the US has been well reported since the spring. But evidence is now emerging that demand growth could also soon slow in China, where jet fuel import demand is now expected to slip even further in the fourth quarter of this year after a fall recorded in the third quarter.
Traders' estimates of Chinese jet fuel imports for the fourth quarter ranged from 1 million to 1.2 million tonnes, down from around 1.26 million tonnes bought by China Aviation Oil during the third quarter.
In the second quarter CAO, China's dominant importer of jet fuel, bought and supplied 1.57 million tonnes, up 73% year on year and around 38% higher than in the first quarter.
China is also holding relatively high gasoil stocks at present. As a result, local refineries are expected to scale back output of gasoil and produce more jet fuel, one Beijing-based trader said.
Chinese consumption has been central to the Asian middle distillate market this year, and was a key reason for the unexpected spike in prices during the second quarter, when demand surged in the lead-up to the Beijing Olympic Games. That period also coincided with a decline in domestic production.
"Following the conclusion of the Beijing Olympics, we expect overall jet fuel demand growth in China to go back to normal," Meng Fanqiu, CAO's chief executive officer, said earlier this month. Indeed, the bubble in jet fuel demand has already deflated, as evident from the fall in CAO's procurement volumes during the third quarter.
Also bearish for the market, it emerged last week that South Korean oil refiners are shaking off weaker overall margins and maintaining their run rates at 80- 95% of plant capacities, mostly unchanged since the start of August.
Scheduled maintenance since June and poor margins trimmed South Korean refining output earlier in the summer, but refiners have so far held off further cuts.
A strong rebound in the value of fuel oil relative to crude oil has also helped keep run rates high.
Think tank warns of possible OPEC over-reaction
Amid such bearish fundamentals, global oil prices are expected to fall further unless OPEC overreacts and slashes production sharply at its next meeting in September, the Centre for Global Energy Studies said in its latest monthly oil report.
"If OPEC overreacts and cuts its output too sharply, depriving the world of the oil it needs, the much needed downward correction in oil prices could prove to be short-lived," the CGES said.
The London-based think-tank, established by former Saudi Arabian oil minister Ahmed Zaki Yamani, said that while OPEC "does not appear unhappy to see oil prices falling back from close to $150 per barrel, the point may be rapidly approaching when that sentiment changes."
But the CGES said it was unlikely that the producers' club would rein in supply when it meets in Vienna September 9, unless prices are "well below" $100.
"The CGES believes that OPEC member countries, facing increased government spending and rising inflation, will not be happy to see prices fall far below $100 per barrel," the report said. Western governments in pursuit of environmental and oil import reduction policies may also not want to see prices fall too low, it added.
"The danger for those looking forward to more reasonable oil prices is that OPEC, haunted by the price crash of 1998, overreacts and cuts its production too sharply," the CGES report said, adding that the risk of such a response is heightened by OPEC's over-optimistic view of non-OPEC output over the coming months.
"The worsening economic outlook suggests that oil prices have further to fall, but OPEC, whose members are due to meet in early September, may act to prevent them from falling too far," it said.
Iran suggests output 1 million barrels a day too high
Iran, one of the most hawkish members of the oil cartel, gave an insight into its likely position on production last week when its OPEC governor, Mohammad Ali Khatibi, said the oil market was oversupplied by about 1 million barrels per day. He urged the group's members to return to their production targets to help drain the excess oil and restore market stability, student news agency ISNA reported.
"OPEC is supplying about 1 million barrels per day more oil than the market demands," Khatibi was quoted as saying. "Usually, when a market is oversupplied, prices are pressured downward." If members return to their production commitments, "this will both cut the additional supply and preserve the stability of the market," Khatibi said.
He referred to what he called a "sudden increase of OPEC's production which has led oil prices to fall...therefore, a part of fundamental elements causing the oil price fall is due to this move."
The Iranian official excluded Iraq, Ecuador and Angola, the three OPEC members not bound by production restraints -- and he did not say which of the group's other 10 members was producing above target.
But he appeared to be referring to unilateral production increases by OPEC kingpin Saudi Arabia, which has boosted production in recent months to 9.7 million barrels per day from 9.45 million barrels per day in June
Updated: August 25, 2008
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