Commodities: Brent/WTI spread approaches US$15, IEA updates global oil demand projections

All prices unless otherwise stated are for the close of February 9.
2012 baseload German power: €51.25/MWh, down 0.27%
2012 CIF ARA Coal: €116.58/t, down 0.17%
Front-month UK natural gas: GBp53.08/therm, down 1.03%
EU emission allowances (EUAs) for December 2011 delivery: €14.68/t, down 0.20%
Certified Emission Reduction(s) (CERs) for December 2011 delivery: €11.21/t, down 0.27%
Brent crude oil futures for front-month 2010 delivery: US$101.54/bbl, down 0.3% as of GMT 09:30, February 10
WTI crude oil futures for front-month 2010 delivery: US$87.55/bbl, up 0.5%, as of GMT 09:30 February 10

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Brent and WTI moved in opposite directions on Wednesday. WTI fell after the EIA reported a surprise 4.7mbbl increase in gasoline inventories, which outweighed a lower-than-expected 1.9mbbl rise in oil inventories. Distillate stockpiles also provided substance for oil bears, rising by 300,000bbl, compared to predictions of a 1.4mbbl decline. Supplies at Cushing fell by 927,000bbl to 37.4m.

The contract for March delivery fell by US¢23 to settle at US$86.71/bbl on the NYMEX., while Brent crude rose US$1.90/bbl to finish at US$101.82/bbl.

Today is seeing both contracts make slight gains in morning trading, with WTI rising to near US$87/bbl due to a report released on Wednesday by Platts, which states that oil output by OPEC members rose by 1% last month to average 29.57mbpd, the highest level seen in two years. Further support has come from continuing fears that a military crackdown against protesters in Egypt might occur, as protesters have stepped up their efforts and are looking to mount a major protest in Cairo’s Tahrir Square on Friday and Foreign Minister Ahmed Abul Gheit has warned that the army would intervene. Earlier, the spread between Brent and WTI rose to a near-record US$15/bbl, due to high inventories at Cushing and pipeline bottlenecks that hamper the logistics of delivering crude from the terminal to some key regions of the US.

The IEA in its monthly oil report has said that Chinese fuel demand might rise by 6% this year, down from the 12% growth seen in 2010, due to a slight slow down in the economy and lower oil intensity. It estimates that Chinese fuel demand was 9.39mbpd in 2010, revised up 0.6% from its January 18 report. Consumption in 2011 is expected to average 9.96mbpd, up 570,000bpd on 2010. However, the IEA has stated that “China’s oil demand outlook has become increasingly crucial for global oil balances. Predicting Chinese trends, however, is far from being an exact science, mostly because of huge uncertainties with respect to official data…. Indeed, official GDP figures appear too low when compared to other indicators, such as industrial production, which rose by over 15% on average.”

The agency puts OPEC oil production in January at 29.85mbpd, up 280,000bpd on December and has slightly upwardly revised its 2011 oil demand growth forecast to 1.46mbpd, which means that global world demand is now expected to break past 90mbpd late this year for the first time. OECD oil inventories hit a two-year low in December at 57.5 days of cover but are still comfortable and the IEA believes that this coupled with spare capacity “does provide some potential to constrain further prices increases in 2011.” However, some analysts and commentators are sceptical regarding the extent of Saudi Arabia’s spare capacity, given that much of it is sour crude and therefore difficult to refine. Recent information released by Wikileaks suggesting that the kingdom has been exaggerating its oil reserves and is having to work harder to stay still (for more information, see our recent article Wikileaks: US concerned over Saudi Arabia’s oil reserves, …).

US natural gas for March delivery settled up US¢4, at US$4.044/mBtu, thanks to bargain buying triggered when the contract touched an intraday low of US$3.992/mBtu. Forecasts for warmer weather are still proving to be the major cause of bearish sentiment, coupled with the encroaching arrival of spring. A Dow Jones Poll is predicting that the EIA will report later today a 200bnft³ withdrawal from storage for the week ended February 4, due to a combination of disrupted output and high demand caused by the cold weather. If correct, inventories would be 1.6% above the five-year average.

A Reuters poll of 22 analysts and market participants expects DES ARA coal to average US$121/t, up from the US$90/t forecasted in January 2010. DES ARA prices have so far averaged US$115/t this year. Richards Bay prices are expected to average US$115/t FOB, up from the US$85/t forecasted last year and current prices of US$115/t. The forecast for Australian Newcastle coal is US$126/t, up from the US$89/t predicted last year, but only up US$3/t on the current spot price. Generally, traders are expecting more volatility, given coal’s recent responsiveness to other energy commodity price movements, the growing impact of Chinese spot buying (or its absence) and the potential for further supply disruptions. Overall, prices are expected to rise this year, but there is some potential for weak Chinese demand in the second quarter to push prices lower in the short-term.

EUAs were pushed down slightly due to a mostly negative energy complex and the fact that natural gas prices fell to a greater extent than those of coal. Additional pressure came from a German auction of 570,000 EUAs, which cleared at €14.65/t. However, strong resistance around the Dec11 contract’s 14-day moving average kept losses to a minimum.

CERs saw similar losses, with both the Dec11 and Dec12 contracts giving up 0.27%, causing the Dec11 and Dec12 CER-EUA spreads to finish the day relatively unchanged at -€3.47 and -€4.18, respectively. The CDM’s Executive Board has announced that it has only seven projects to review at its imminent meeting in Bonn, compared to the 108 projects evaluated during the same meeting back in 2010.