The combination of good and bad news should drive oil prices out of their recent trading range and up towards $95, according to David Greely at Goldman. The global economy had some notable upside surprises from the U.S. and Japanese economies recently, and will also benefit from oil supply disruptions in the North Sea, France, and VenezuelaGoldman: This week, WTI crude oil timespreads continued to strengthen off positive economic news from the 1st and 2nd largest developed market economies – the United States and Japan. The United States reported positive year-on-year growth in industrial production for the first time since the start of the recession, and Japan reported its economy expanded at a 4.6% annual rate in 4Q2009, well above the consensus expectation of 3.5%, led by strong exports. Further, negative supply news, including a disruption in North Sea crude oil production, reduced Venezuelan fuel oil exports due to a power generation crisis, and the potential for a refinery strike in France, suggests a tighter near-term supply-demand balance.
We continue to expect that improving near-term oil market fundamentals will continue to tighten WTI timespreads. Consequently, we believe the more important trading range for WTI crude oil prices is not the low $70-low $80/bbl range they have traded in since last October, but rather the $85-$95/bbl range that long-dated WTI crude oil prices have been trading in over the same time period (see Exhibit 2), and we continue to expect that as the near-term fundamentals of the oil market continue to improve, strengthening timespreads will lift WTI crude oil prices into this $85-$95/bbl range.
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Oil bulls can thank French unions and Mr. Chavez.
There was also news this week that the Venezuelan power generation crisis is beginning to spill over to the broader oil market, with PDVSA likely to reduce exports of diesel and fuel oil as it tries to increase domestic power supplies. The crisis was precipitated by a drought which has left water levels in Venezuela’s Guri Dam 33 feet below last year and at less than half its capacity. The Guri Dam powers the world’s third-largest hydroelectric plant, which provides 73% of Venezuela’s electricity. If the water level were to fall another 82 feet before the dry season ends, power generation at the plant would come to a standstill.
However, in the near-term, reduced runs at the French refineries could accelerate the draw on petroleum product inventories while reducing the draw on crude inventories. As product inventories remain much higher than crude oil inventories relative to normal, this could accelerate the process of reducing the overhang and product inventories and rebalancing the market.
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(Via Goldman Sachs, Energy Weekly, David Greely, 21 February 2010)
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