>Global Oil Fundamentals: On The Margin (MORGAN STANLEY)

• Oil fundamentals are weighing on the oil market more so than they have at any point in the last six months, in our view. Demand in the OECD, the easiest of data points for participants to focus on, has continued to fall short of expectations, leaving product stocks bloated and weighing on refinery margins. Margins have now fallen so precipitously that most refiners globally are losing money.

• This bearish development is reflected in the resistance that oil is seeing at $80/bbl. The reflation and liquidity trade that lifted oil together with global equity markets and other commodities does not appear sufficient to overcome currently weak fundamentals.

Crude Oil Fundamentals: On The Margin

• We are staying with our $85/bbl forecast for 2010, as we continue to expect demand to improve and inventories to clean up. The recent data does show inventories easing, consistent with our expectations, however the recent increase in oil stored at sea complicates this assessment.

• We now see global demand rising by 1.5 mmb/d in 2010, with non-OPEC supply to increase by 400 kb/d – more constructive than the IEA which sees demand growth of 1.4 mmb/d and non-OPEC supply higher by 770 kb/d.

• Oil continues to be buoyed by the faltering USD. Oil’s negative correlation with the USD remains impressive and no doubt is frustrating to bears. As a house we remain structurally bearish on the USD through 2010, but given how crowded the short USD trade has become, short-covering rallies are to be expected. Given the weak physical bid for crude at the moment, we expect the negative correlation with the dollar to hold and any dollar rally to be met with crude weakness.

To read the full report: GLOBAL OIL