Barclays expects that crude oil prices are likely to gravitate back towards the magnetic $111/bbl mark once the current eclipse of macro-economic headlines fade, with further oscillations possible in the short term within the $6/bbl radius off this centre point, depending on the frequency and nature of future macro- economic headlines.
If possibilities of a breakout from this range are to be weighed, then it continues to be skewed to the upside, with several geopolitical under current sposing risks to the supply system and likely to act as catalysts for a breakout once triggered.
The front-month Brent contract hit a fresh three-month low this week. Fundamentals have taken a back seat for now in determining momentum but continue to provide support by slowing the downward drift. The oil market demand-supply equation remains well balanced and the recent price moves continue to be contained within a $6/bbl radius off the $111/bbl mark around which average monthly Brent prices have moved in 19 of the past 23 months.
On fundamentals, this week’s JODI data continued to highlight the prolonged decline in European products demand. Yet this seems to be moderating somewhat, with the January growth decline pegged at 2% y/y, compared with December’s 8% y/y fall. The divergence between the core and periphery economies remained marked and, continuing a two-year trend, product demand remained lacklustre in the lagging European periphery (down 8% y/y).
Utilisation rates were already lower at around 85% in February, but initial surveys for March uggest runs among state-owned refineries fell further, to 77%, in March on planned maintenance activity. This suggests that a stronger call for imported crude from China is likely to start in Q2, once refineries return from maintenance, although March’s import numbers will likely be elevated (including the backlog from the holiday period in February).
Gasoline consumption remained strong in February, touching a new record of 2.28 mb/d. Holiday driving helped support these numbers, with inventory levels in 13 provinces falling from a high of 2.23 Mt in late January to a seasonal low of 1.95 Mt in late February. A national highway toll waiver during the holiday also supported gasoline demand. expect this trend to persist for the rest of the year. For details of Barclays view on gasoline demand across China and globally, see: Oil Focus: Gasoline in 2013: Domino margins and the search for octane.
Gasoil consumption was 1.2% lower y/y in February, coming in at 3.57 mb/d. The weakness relative to February reflected the temporary suspension of road and mining projects, as well as idle trucks during the holiday period. expect gasoil consumption to pick up in Q2,on the back of strong fundamentals (ie, a pick-up in construction activity and an increase in truck traffic). Truck traffic has already registered strong growth of 24% in January 2013.
Fuel oil demand, meanwhile, rose 20%y/y, coming in at 843k b/d (with the y/y change distorted by last year’s lower base). are not constructive on 2013 fuel oil consumption in China given that the changing landscape for China’s independent teapot refineries (government mandates to close those with capacity of less than 40k b/d, plus the granting of crude import licences) should mean a strong call for crude oil over traditional fuel oil imports.
Overall, implied oil demand in February remains above 10 mb/d (with y/y growth pegged at 4.4%). This is closely in line with expectation of 5% y/y growth in 2013. Despite the cautious macro policy (modest growth targets) introduced at China’s annual National People’s Congress (NPC), there have been positive signs for oil demand, with manufacturing activity returning to a mildly expansionary phase (the flash PMI for March came in at 51.7).Auto sales have recovered despite purchase restrictions, as have property sales, which surged 49.5% y/y in the first two months of 2013.
Source: Barclays