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

than an unrelenting rise in prices as witnessed in
2007-2008. This view was based on the belief that
the market’s balance would tighten progressively. As
such, a sustained leg-up in the price appears more
sustainable in the second half of 2011.
Among the fundamental hurdles the market faces,
we find:
• Spare production capacity in OPEC
countries of about 5.5 mb/d (most of which, unlike in
2008, can be processed with the additions to global
refining conversion capacity over the past two years);
• Still-elevated stocks in consuming countries
(on a volume and demand cover basis); and
• Decent y/y non-OPEC supply growth in Q1
and Q2 2011. We have not changed our point of view
on this assessment.
If global oil demand continues to recover in 2011, this
will be down to emerging markets; the West
continues to struggle. As we ended 2010, world oil
demand had more than recouped its recession and
financial crisis induced declines of 2008-2009. Indeed,
it was up almost 2.7 mb/d y/y at just under 88 mb/d.
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%.
Even if we were to assume last’s year pace of growth
in oil demand and zero non-OPEC supply growth,
this would not be enough to exhaust spare
production capacity in OPEC countries in 2011.
Equally, in our last update, we highlighted the risk to
oil prices stemming from inflationary pressures in
emerging markets. We stressed that subsequent
monetary policy tightening would challenge risk
appetite. As a result, liquidity put into risky assets,
including commodities, might be withdrawn. But the
impact of tightening does not end there: expectations
for economic growth and therefore oil demand growth
may become challenged.
Chief among countries in this situation is China, a lead
contributor to oil and commodity demand growth. It
has taken gradual, repeated steps towards tightening
monetary conditions at home through hikes in reserve
requirement for its commercial banks (as well as
outright interest rate hikes and other measures)
As we highlighted in our last price update and in
previous market comments 2 , WTI’s behaviour relative
to Brent was contemporaneous in 2009-2010 with that
mb/d
4.0
3.5
3.0
Chart 3: North Sea Crude Oil Production
Crude Supply
Diff to 5 yr avg
North Sea Crude Production
0.2
0.0
2.5
Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11
Source: IEA Oil Market Report, BNP Paribas.
'000 Contracts
1600
1500
1400
1300
1200
Chart 4: WTI vs. Brent Open Interest
NYMEX WTI (LHS)
ICE Brent (RHS)
‐0.2
‐0.4
‐0.6
‐0.8
‐1.0
‐1.2
1000
900
800
700
1100
600
Jan 09 Jul 09 Jan 10 Jul 10 Jan 11
Source: Bloomberg, BNP Paribas.
Chart 5: Share of WTI, Brent in the S&P GSCI*
40%
30%
20%
10%
WTI Brent
36.2%
32.4% 32.7%
12.7%
14.3% 15.1%
Jan 09 Jan 10 Jan 11
Source: Index sponsor and BNP Paribas. * Indicative.
of its contango on the short-dated portion of the
futures curve (Chart 2). While US crude oil inventories
have regularly declined, mainly on the Gulf Coast,
those at Cushing bucked the trend in December by
climbing higher. At the last count, they stood at 37 mb,
or near their mid-March peak, when both the front
month contango on the WTI curve and WTI’s spread
to Brent widened considerably.
This accumulation of stocks, driven by either weaker
off-take of crude by refiners or excess supply trapped in
a landlocked location, matters less than the fact that
2 Oil Market Comment “Brent/WTI Premium the Usual Suspects
(24/11/10)
Oil Market Comment “Brent Premium to WTI, Live to die another day
(23/08/10)
Harry Tchilinguirian 20 January 2011
Market Mover Non-Objective Research Section
67
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