The Oil Market Quarterly Outlook

Fundamentals Global oil demand has recently surpassed production even though OPEC produces more than agreed. Thus, our fundamental index is set for Neutral indicating that prices should be within OPEC's announced trading range of 70-80 dollar per barrel - looking at fundamentals only.

Supply/demand balance The balance has shifted slightly in the past reports. OPEC is still producing more than its quota, but demand growth is solid-especially from non-OECD. After a period with increasing oil inventories around the world, we are now facing a period with stagnating inventories at high levels.

This is in itself bullish for oil prices, but bearing in mind the heavy excess ca-pacity, we

increase this factor from a neutral to a slightly bullish effect on oil prices. Refinery earnings signal imbalance building

Refineries are currently facing a shift in the market from a heating oil and gasoline margin around 10 dollars per barrel to a margin of 15 on heating oil and only 5 dollars on gasoline. Part of the reason is an unseasonal build in gasoline inventories and part is differentiated growth in demand for the pro-ducts. Apparent US distillate demand is at a growth level of 13% compared to last year, while gasoline demand is flat.

The imbalanced growth in oil product demand is going to have a bullish effect on crude oil prices. We upgrade refining margins to a moderately bullish effect on oil prices.

Floating storage attractive for WTI Crude again?

Excess supply of WTI Crude has led to a reopening of floating storage arbi-trage trade during the last month. These openings are a sign of oversupply of WTI Crude. However, on the ICE Gasoil we have seen a change to negative yield on storage, indicating relatively tight supply compared to other oil grades. This gasoil story is interesting to follow as it could be related to tighter IMO rules for the emission of sulphur in the SECA area. Indications of combined oversupply of WTI Crude and a tight gasoil market leads us to a floating storage indicator at slightly bullish for oil prices.

Financials Financials become more important as central banks around the world are combating their own currency at the same time. We can see this in both money managers' net position and the inflation outlook. As re-gards world growth - there is a stable development with less growth in OECD and higher growth in non-OECD.

Expecting cash inflows into commodity markets Investor interest in the oil market is now at the summer 2008 peak level. This increased interest has been present in most commodities. Especially gold has experienced heavy interest from investors. Uncertainty about where the dollar is heading and uncertainty about what the US Central Bank will do support commodities in general. We upgrade the money managers' position to a moderately bullish factor for oil prices.

World GDP outlook stable Growth prospects for OECD have been reduced the past months. US growth is dampening due to the run out of different stimuli programmes. Europe is dampening as concerns about PIIGS countries have turned focus towards budgetary discipline. However, emerging markets with China in front show continued growth and hence we keep our moderately bullish view for this strength indicator.

Inflationary pressures will resurrect after QE2 QE2 or a second round of Quantitative Easing from the US Central Bank is causing inflation worries on commodities. A lot of central banks are currently competing on how quickly they can print money. The FED almost promises more dollar liquidity. Chinese money supply growth is around 20% per year to keep a stable currency versus the dollar and Japan intervenes to lower the value of the Yen.

Brazil has warned of a coming currency war as central banks around the world will try to deflate their own currency to support exports. We are increas-ingly worried of this as the US purchasing managers' index for prices paid are at 70 again. We upgrade this factor to bullish for oil prices.

Geopoliticals Geopoliticals for the oil market remain constant. There has , however, been a shift to a focus on Iran and whether or not we will see military action against the country. Nigeria is relatively stable - although we could see some increasing sabotage activity up to the coming election. Venezuela is calming too as Chavez has won the election - amid he lost the qualified majority.

Iranian oil production threatened by sanctions Iran is apparently continuing to enrich uranium for the planned power plant. However, at least they cannot convince the UN that they will not go for build-ing nuclear weapons. Further sanctions have apparently caused the Russians to cancel deliveries of an anti-air system and a high tech computer worm has attacked the nuclear facilities. Also, there are reports that Israel has bought for 2 billion dollars military jet fuel, which for example can be used on a large scale airstrike on the Iranian nuclear facilities. Looks like we are facing a tick-ing time bomb. We keep Iran very bullish for oil prices.

Nigerian oil production increases well beyond quotas Current political mood in Nigeria is calm with no major sabotages or terrorist incidences reported in recent months. Nigerian officials have even called for an increase in production quota at the December OPEC meeting. Even though as we could see increasing unrest up to the January 22 election, we keep Nigeria as having a bearish geopolitical effect for oil prices.

Venezuelan oil production facing a nationalisation pause President Chavez has won another election recently. However, this time he failed to gather the 2/3 qualified majority. The election and its outcome will put a dampening effect on his nationalisation crusade, where he has thrown out oil majors in the country along with much needed drilling expertise the past years. First of all, he would now not have to nationalise more to keep his revolution going as he has won the election and secondly he has lost the ma-jority-so it would be more difficult for him. We have downgraded the Venezuelan impact to a slightly bullish effect.

Global Risk Management Oil Price Forecast The forecast has been revised up as there are increasing worries of currency wars and increased inflation. Compared to actual prices, oil can currently be hedged at attractive levels going forward, when looking from an oil consumer's perspective. Comparing our forecasts with others, we are slightly below the median Reuters poll for 2010 (77.48$)and above for 2011 (84$).

Forecast Accuracy Accuracy in our price forecasts has been satisfactory. The forecast error is between -25% and +24% in that period. The mean long term forecast is below zero and more accurate. This effect could be due to short-term volatility effects on short-term forecasts. On average the forecast has been lower than the actual development - primarily due to the fact that the rebound in the economic development has been faster than expected.

Recent development in forecast accuracy has been good, with only a half dollar forecast error for Q3 2010.

Source: Global Risk Management / maritimedanmark.dk