Last week saw the front month Brent contract edging higher, moving out of its narrow trading band around $111/bbl, and posting a fresh three month high.The drift higher was more so from a combination of factors reinforcing constructive market balances and sentiment, rather than being triggered by a significant news event activating momentum. The positive factors include many things as outlined by Barclays:
--Improved global macroeconomic sentiment has moved from a relief rally following the reduction of tail risks to positivity linked to a healthy set of economic data releases, with strong Chinese PMI data and reduced US jobless claim numbers leading the ranks.
--Pockets of geopolitical instability (Syria, Algeria, Libya) are mounting at quite an accelerated pace and the sum of the parts is helping to provide support for prices at these levels, even though large-scale events have yet to materialise in a significant way.
--Good Chinese oil demand figures with December Chinese data extending the stellar growth trajectory seen since October. Chinese oil demand grew by 8% y/y in Q4, making a steady recovery when compared to the 3% y/y average growth seen over Q3. Refinery runs also maintained a steady pace of growth in December (up by 10% y/y) to a record 10.18 mb/d. The ramp up in refinery runs has been a result of several new refineries coming online over Q4, in particular the 200 thousand b/d PetroChina refinery in Sichuan and the 120 thousand b/d Shandong Dongming refinery.
Overall, Chinese crude oil imports are supposed to remain healthy, given:
--More refining capacity coming online (> 450 thousand b/d); domestic product demand growth to be supplemented by product exports to regional consumption centres that are also exhibiting a strong growth; and a switch in appetite by teapot refineries from fuel oil to crude oil. Taking into account all these factors, we expect crude oil demand growth in the country to average 460 thousand b/d in 2013.
--Non-OPEC supply (ex-North America) has carried forward the trend of shortfalls seen last year. The restart of the 350 thousand b/d exports from South Sudan has been delayed again, following negotiations with its Northern neighbour reaching a deadlock. There are no new talks planned until mid-February, suggesting a continued void in the market.
--Among OPEC suppliers, Libya has seen the resumption of its crude exports from the Zuietina terminal (69 thousand b/d) being pushed forward to mid February. The terminal was disrupted due to local protests earlier this month, and has been shut in since then.
It may be that Brent has finally been successful in breaking away from the magnetic $111 mark.
Source: Barclays