The Structure Of The Oil Market Hasn't Looked This Weak Since 2010

Falling pump prices are helping boost the U.S. economy to the tune of a
130 basis point jump in personal consumption expenditures.
As we always emphasise, that has less to do with the Great American Shale Boom, which mostly impacts West Texas Intermediate prices, than it does with the macroeconomic factors affecting the price of Brent, which is the more global oil benchmark.

In a new note, Morgan Stanley’s Adam Longson details just how dramatic the fall in Brent prices has been. He notes that forward prices are converging toward the lower spot price.

The last time that happened around this time of year was 2010.

Here’s what Longson says is happening:

…A falling USD, Libya/Iraq headlines and bearish WTI-Brent positioning have helped support prices. If these support mechanisms begin to erode, as we expect, prices could fall to match the weak physical market. Expectations of an ECB rate cut have already reversed the weak USD trend. Higher seasonal demand and lower refinery maintenance offer some offset, but poor global refining margins will continue to limit runs.

And more overseas supply is coming online: stocks are “recovering” in Iraq as maintenance winds down, Longson says, with production climbing 300,000 barrels per day MUM in October to 3.1 million barrels/day. Lower seasonal demand in Saudi Arabia should also “free up more crude for export if production remains elevated,” he writes. There’s even more incremental supply coming out of the North Sea. Only Libyan production remains volatile.

Longson expects Q4 Brent prices to remain around current levels, but a bear case could see spot prices fall to as low as $US98.

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