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