Crude Oil Overview Report - summer 2012

Economic over view: News that affects crude oil prices in recent times:

NORTH SEA OUTPUT DROP> North Sea crude oil production will fall about 17 percent in September from August, mainly due to a drop in Forties crude output with the Buzzard field offline for maintenance. IRAN AND MIDDLE EAST>The North Sea output drop comes with the European Union's embargo on Iranian oil in its second month as the West's dispute with Iran over Tehran's nuclear activities drags on. Remarks by Prime Minister Benjamin Netanyahu on Sunday, stating that most threats to Israel's security were "dwarfed" by the prospect that Iran could develop nuclear weapons, kept fears about potential supply disruptions in focus. Beside that the oil market is concerned once again that Iran will try to block oil shipments through the Strait of Hormuz, a narrow waterway in the Persian Gulf through, through which one-fifth of the worlds oil travels every day. Syria> Syria's ongoing civil war kept intact another element of uncertainty in the region and support oil price. Russia and US> Russia sharply criticized new U.S. sanctions against Iran on Monday, saying the measures to punish banks, insurance companies and shippers that help Iran sell its oil would harm Moscow's ties with Washington if Russian companies were affected.

A post from Rachel Ziemba of RGE excerpted below highlights the potential premium the oil markets are attaching to the growing Iran V Israel rhetoric and.............

RGE Forum Post on Israeli strike worries reach fever pitch

.........Israel, where war preparations have picked up sharply, according to the local press. Worries over a unilateral Israeli strike on Iran's nuclear facilities have reached a new level of late, with some Israeli officials even suggesting a strike could come as soon as August 20, the next full moon. A combination of warning statements from former defense officials, contingency economic planning, security dry-runs and new administrative measures that would help PM Netanyahu push through a strike, suggest that once again the risk of a strike has increased. While it is impossible to speculate on the timing of such an attack, a low-to-moderate

probability of a high risk event in the near term, the chances are rising, meaning it is worth revisiting what an attack could imply for oil prices and the global economy (a likely spike and risks of another recession respectively). The initial impact would likely be an overshooting of the oil price, even if supply chains remain open. In case of retaliation, Israeli assets would likely suffer, while the straits of Hormuz could face temporary closure. We expect this would quickly become a regional conflict, with the U.S. drawn in. Even if supply lanes remain open, we could expect oil prices remaining elevated after any conflict as the risk of future conflict remains high. Intrade contracts (below) suggest that collective wisdom thinks the probability of an attack has risen, but remains well below 50%. Not only has the chance of a U.S./Israeli strike risen but the volume of bets on the two most liquid contracts increased sharply.

.the technical difficulties of Israel going it alone, the optics of doing so during the Eid, it seems most likely that the Israelis aim to make sure that the Americans do not allow Iranians to just play for time. We expect not only more sanctions, but also more covert activities to challenge the nuclear program. And with Iranian oil output continuing to drop, and adding some pressure to the oil markets.......... the moderate supply shock from Iran, the unexpected supply shock from the North Sea and worries of future supply shocks have sent oil prices up strongly, helping stabilize the macro outcomes in the GCC and other oil exporters. The return of the Iran-related fear premium means oil prices are climbing back toward levels that could pose demand destruction. Another round from the FED ; Qe3, which we still see as a greater than 50% probability, in such an eventuality oil prices should stay elevated through most of the remainder of the year and much higher than warranted by underlying global growth.

Our Technical Overview: Crude oil had an interesting week ,last week and this , as in five sessions it attempted to rally, but was turned away at the $95 level. We find the fact that last week it formed a shooting star, just after forming two hammers in a row. This suggests to us that there is a consolidation coming, and unless the market can close above a 94-95 dollar area the WTI crude oil markets will be stalled between a $84 - $87 and $92 levels. However; on the weekend the markets closed above 95 and thus signaled a strength that can take this to a 97$ to a 100$ range

Therefore the trade set up for a longer-term trader will be as follows. If crude breaks above the shooting star ($95), we go higher and longer-term traders will be long. If we break below the two hammers ($87), this would suggest weakness coming back into the market and support giving way which of course means that longer-term traders will be short of this market. In the meantime, range trading....with one eye on Israel Iran situation emerging.........

Crude oil prices continued its upward trend during last week; the gap between Brent and WTI also expanded during most of the week. The concerns over the rising tensions between Iran and Israel might be contributing to the rally of oil rates. Key Technical Area: The light sweet crude markets had a positive week over the last five sessions, and more impressive is the fact that for last 5 days of trading, we saw higher highs in crude, so it certainly looks like that the upside pressure is building. Looking at the charts,Currently we are in the middle of this consolidation zone, so choppiness could be the norm. There are a lot of potentially bad headlines to come out of Iran over the next couple of weeks, so a spike in prices is certainly possible. To put things in perspective, there are reports that the Obama administration is currently looking to release some of the strategic petroleum reserves, or SPR, in order to help combat rising gasoline prices in the United States. Upon this report, oil prices actually rose. The last time they attempted to release the SPR, it actually brought prices down but only for about a week. It seems that the markets are more in tune with what difference the Obama administration can actually make and for how long that can really hold.....It also shows exactly how bullish the underlying are; as if there were any weakness we would have seen some type of pullback from this story breaking but traders are just buying dips at this point in time and understand that $100 will be a hurdle but a confrontation at the Straits of Hormuz shall prompt a spike well above that !!

Long term weekly and monthly , daily Charts of Brent Crude .from livecharts.com Brent Weekly Continuous

Brent Monthly Continuous

Brent Daily Continuous

Brent Daily Continuous RSI is in a neutral zone and there is a upside candlestick hammer in the daily brent chart, technically market is in a indecisive mood on the very short term but up-trending due to geopolitical concerns. Shrugging off the demand destruction and growth concerns this is a smart bounce up during summer months, ignoring stocks and deflationary trends in the EU... We feel that $116 will be a key resistance for Brent. Currently trading within a tight range over the past few days between $111 to $114. a break above $116 will be decisive....

Oil Price movement Oil prices hit an all-time high of $145 a barrel in July 2008. Most news sources blamed this on surging demand from China and India, combined with decreasing supply from Nigeria and Iraq oil fields. After that Crude oil prices reached a recent high of $113.93 on April 29, 2011. Prices had been increasing steadily since February 2009, when prices dropped to $39 a barrel. Since then Prices is hovering at a comfortable range between $80-$100 a barrel. Oil Prices: Bleak Macro Outlook; Fundamentals and Stimulus to Provide Strength ?

Upside Risks
Central bank and government policy stimulusQE3 providing short-term limited boost

ImmediacyyImpact

Downside Risks

ImmediacyImpact

NT-MT

Low/ Medium

European sovereign debt crisis political and policy uncertainty NT-MT weighing on market sentiment. Possible Greek exit from the eurozone

High / Medium

Increased summer demand NT-MT / tightening fundamentals

Slowing global growth hits demand and sentiment: Anemic growth in the U.S.; Low/Medium NT-MT recession in the eurozone and slowing Chinese growth (soft or hard landing)

High/ Medium

Strait of Hormuz supply disruption/EU-Iran oil NT-MT embargo distortions/Increased Iran rhetoric Instability in MENA countries (Iraq , Syria, NT-MT Yemen, Libya, Algeria, Egypt and Bahrain) adding

Medium

Flight to safety stregthening USD

NT-MT

Low

Medium/High

QE in other DMs limit NT-MT dollar weakening

Low

to oil risk premium

U.S. / China macroeconomic data NT-MT surprising on the upside, improving sentiment Chinese strategic reserve stockpile building / NT-LT refineries coming back online

Medium

Iran, Israel cooling of rhetoric/sanctions working, reducing oil risk premium

NT

Low/ Medium

Low/ Medium

Risks of further tightening of DM credit NT-LT markets; EU banking crisis Greater supply including : Modest Libya supply increases; renewed drilling in the NT-MT Gulf of Mexico; and greater Canadian and North Dakota output

Medium/ Low

Supply outages in South NT-MT Sudan, Yemen and Syria

Medium

Medium

OPEC GCC countries curbing production in the face of falling demand and NT-MT rising Libyan, Angolan and Iraqi output Nigeria strikes/political unrest disrupting production NT-MT

Medium

Increased OPEC output NT-MT

Medium

Medium

Strategic petroleum reserve release

NT-MT

Medium

ECBs 3y LTROs alleviate credit strain on NT-MT refiners/support growth

Cushing pipeline capacity additions (exerting downward Medium/Low NT-MT pressure on Brent prices and upward pressure on WTI prices) EU bank credit tightening as capital reserve requirements rise

Medium

Weak USD, sustained low NT-MT DM interest rates Chinese strategic reserve stockpile NT-LT building/refineries coming back online

Low

NT-MT

Low

Low

High oil prices lead to NT-MT demand destruction U.S. political gridlock threatens credit outlook and recession, weighing NT-MT on consumer oil demand and market sentiment

Medium

Oil exporter budget balancing = US-85/barrel NT-MT support (WTI)

Low

Low

Asia, the Middle East and LatAm are constructing refineries that may NT-MT decrease excess crude supply in developed markets/blend distortions Environmental concerns MT-LT increase production costs Slowing OPEC net export LT growth

Low

Low Medium/Low

Table from RGE NT=Near Term, MT=Medium Term, LT=Long Term Risk

Demand (Global Economic Activity)........ Weak Demand, but Optimism Grows One of the key drivers of oil is the global economic growth, particularly in emerging market economies. As shown in Figure 1, world gross domestic product (GDP) growth (with countries weighted by oil consumption shares) has averaged close to 5 percent per year since 2004, marking the strongest performance in two decades.

Supply (Stagnant Production) While global demand has remained strong, overall non-OPEC production growth has slowed. In the past three years, non-OPEC production growth has been well below rates seen earlier this decade. World oil consumption growth has simply outpaced non-OPEC production growth every year since 2003. This imbalance increases reliance upon OPEC production and/or inventories to fill the gap. However, since 2003, OPEC oil production has grown by only 2.4 million barrels per day while the call on OPEC (defined as the difference between world consumption and non-OPEC production) increased by 4.4 million barrels per day. As a result, the world oil market balance has tightened significantly.

Figure RGE : OPEC Output (1000 bpd)

Increasing Consumption The rise in global economic activity has been accompanied by corresponding growth in world oil consumption. Since 2003, world oil consumption growth has averaged 1.8 percent per year. Non-member countries of the OECD, especially China, India, and the Middle East, represent the largest part of this growth. Despite higher prices, growth in world oil consumption remains strong.

Data from EIA

High correlation between S&P 500 and WTI crude oil price: Recently oil prices reached above $107 and $90 for Brent and WTI references, respectively, due to increasing tensions in the Middle East. According to Department of Energys Energy Information Administration, it is interesting to note that since 2009, up ticks in the U.S. economy have usually coincided with rises in oil prices but from Jan 2009 onward, the two measures have followed each other in near lockstep, breaking only in the months surrounding the Arab Spring uprisings after another price spike. The two explanations have been linked to the recently strengthened positive relationship between the price of oil and the S&P 500. First, expectations of economic growth have an impact on oil prices as increased economic activity generates increased demand for commodities. Second, the development and expansion of commodities indices has allowed oil and other commodities to become a new investment asset whose level of risk/return is similar to that of stocks. This causes investors to trade oil in a fashion more similar to that of stocks, increasing the likelihood that the prices of both would move in tandem.

Data Source RGE + Thomson Reuters

U.S. Oil Inventories at 22-Year Highs; Gasoline Inventories Draw

Source: EIA via RGE

sbhose@microsec.in

asingha@microsec.in

Shamik Bhose

Archan Singha

Commodity & Currency & Interest rate futures Markets ; Microsec Commerze Limited To see our various commodity and related world financial market articles visit www.slideshare.net And www.scribd.com and type Shamik Bhose in the search column to access our latest review and outlook articles alongwith most recent reading interest ;

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