Market Economics | Interest Rate Strategy - BNP PARIBAS ...

Oil Update: Brent Premium the New Norm
• WTI has tested the top of a loose USD 80-
90/Bbl range that we believe will be in place for
H1 2011. Fundamentals have not tightened
sufficiently to sustain a durable move higher in
WTI.
• The spread between WTI and North Sea
Brent has widened significantly. Brent has
developed a large premium, leading us to reassess
the spread assumption to WTI we use to
derive a price path for the North Sea marker.
• Among the fundamental hurdles the market
faces are significant spare production capacity
in OPEC countries; still-elevated stocks in
consuming countries; and decent y/y non-OPEC
supply growth in Q1 and Q2 2011.
• This year, we expect growth in world oil
demand to slow to around 1.5 mb/d,
commensurate with an easing of global
economic growth from 4.7% to 4%.
• It would not be surprising to see more funds
diverted Brent’s way this year to minimise
negative roll-yield, providing an additional factor
of support for Brent relative to WTI in addition to
the fundamentals.
Testing our view for H1 2011
Over the past couple of weeks, WTI has attempted
but failed to sustain a rise above USD 92/Bbl. We
believe that WTI will probably trade within a loose
USD 80-90/Bbl range that will be in place for H1
2011. Fundamentals have not yet tightened
sufficiently to sustain a durable move higher in WTI.
However, more noteworthy, since December, the
spread between WTI and North Sea Brent has
widened significantly (Chart 1). Brent has developed
a large premium, leading us to re-assess the spread
assumption to WTI we use to derive a price path for
the North Sea marker.
As we discuss further on, the persistence (against
our initial views) of several factors contribute to
making a Brent premium over WTI more the norm
than the exception, at least for 2011 and potentially
2012. As a result, we have revised up our quarterly
profile, with Brent now averaging USD 90/Bbl in
2011, USD 3/Bbl higher than we previously expected
(Table 1). We make only marginal changes to our
WTI profile, with little impact on the annual average.
This is seen at USD 89/Bbl.
Table 1: BNPP Crude Oil Price Forecast (18
January 2011)
WTI Revision (2) Brent (1) Revision (2)
Q1 10 (actual) 78.78 .. 77.29 ..
Q2 10 (actual) 78.04 .. 79.47 ..
Q3 10 (actual) 76.11 .. 76.96 ..
Q4 10 (actual) 85.19 -0.81 87.32 0.32
Q1 11 85.00 2.00 88.00 5.00
Q2 11 86.00 2.00 89.00 4.00
Q3 11 90.00 1.00 91.00 3.00
Q4 11 95.00 0.00 97.00 2.00
2009 (actual) 61.79 .. 62.51 ..
2010 (actual) 79.53 0.47 80.26 0.26
2011 89.00 1.00 90.00 3.00
2012 95.00 -1.00 97.00 2.00
Source: BNP Paribas 1) Brent is derived from an assumed spread. * 2012 is
based on the forward curve spreads at the time of forecast. 2) vs. 18/11/10 Issue
Chart 1: NYMEX WTI vs. ICE Brent
$/Bbl
NYMEX WTI Mth1 (LHS)
NYMEX WTI ‐ ICE Brent Mth1 (RHS)
160
140
120
100
80
60
40
20
Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10
Source: Bloomberg and BNP Paribas.
Chart 2: Oil Spreads vs. Cushing Stocks
mb
(Inverted)
25
30
35
40
Cushing Crude Stocks (LHS)
NYMEX WTI ‐ ICE Brent Mth1 (RHS)
MYMEX WTI Mth1‐Mth3 (RHS)
Jan 09 Jul 09 Jan 10 Jul 10 Jan 11
Source: Bloomberg, U.S. EIA and BNP Paribas
$/Bbl
Market conditions not materially different
In our previous forecast 1 , issued on 18 November
2010, we said we expected only a level shift up in the
trading range of WTI for the first half of 2011, rather
1 Oil Market Comment “Past the QE sugar rush, then what? (18/11/10)
5
0
‐5
15
10
5
0
‐5
$/Bbl
‐10
‐15
‐10
Harry Tchilinguirian 20 January 2011
Market Mover Non-Objective Research Section
66
www.GlobalMarkets.bnpparibas.com