>Crude Watch: Stress Tests

Crude Market Having Its Own Stress Test As Spare Capacity

Heads to Zero, Which Could Test the Global Economic Recovery

■ We are marking to market and raising our price forecasts for the rest of the year as recent developments point to higher oil prices to come and the odds of a spike to new peaks rises. Our base case has Brent trading at $125 in 2Q, $130 in 3Q and $125 in 4Q, though we think that the risks are to the upside.


■ The drop in Iranian loadings over the past few weeks is a major concern for the market. Iran has significant volumes of onshore storage and these are presumably getting filled, but once they are done, if Iran continues to struggle to find takers for its oil or ships on which to store it, then next step is to shut in production. In Iran’s case, with their heavy slate and decrepit infrastructure, this would mean production effectively being lost for a long while. Global spare capacity has been dwindling, and crude demand is about to start rising seasonally. Saudi Arabia is gearing up to take production to 11-m b/d over the summer; this would take global spare production capacity to close to zero, while other supplies are already faltering. If the Kingdom draws on ample commercial stocks and deploys even more storage abroad, prices could moderate.


■ The inflammatory rhetoric between the US and Israel and Iran shows no sign of abating, and should continue to support the market. Israeli comments that there will be no public debate before a strike promises to keep that support in the market even if the rhetoric does calm down.


■ Loadings data are now showing a bounce in North Sea supplies coming in April, but the complete set of March loadings data for Russia, Angola, Nigeria, the North Sea and CPC and BTC pipelines show a steep 320-k b/d drop in m-o-m supplies, and a y-o-y slump from 10 to 9.4-m b/d. North Sea, CPC and Russia are the main contributors to the y-o-y fall, but other lost volumes include Yemen, Syria, South Sudan, China and Brazil.


■ The crude market is very strong, and the problem for the oil bears is that gasoline is there to pick up any slack. We have been bullish gasoline for months on the basis of Atlantic Basin refinery shutdowns, and the outlook remains extremely constructive despite the weak demand environment. Stocks have turned seasonally lower in the US, and European stocks are already low and likely will not rebound with the weak margins driving refiners to cut runs.


■ The macro environment provides a third reason to stay bullish. Citi’s Economic Surprise index remains positive — though the US is losing ground on that front — while liquidity continues to flow with major countries’ base money growth accelerating again and inflation breakevens continuing to edge higher. Global equity earnings revisions look set to turn positive; an earnings upgrade cycle would further support oil prices.


To read full report: CRUDE WATCH
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