Wednesday, November 18, 2009

Is oil about to have a physical reality check?

From FT Alphaville:

BNP Paribas’ Harry Tchilinguirian has put out a very interesting oil note on Wednesday.

First, the bank has revised its fourth quarter 2009 WTI price forecast to $77 per barrel versus $66 per barrel previously, due to ongoing USD weakness and low interest rates.

Second, the bank believes the market will soon be forced to price in the weak fundamental picture it’s so far been avoiding with a sharp steepening of the WTI contango.

As to how the contango manifests itself — whether via a near-term sell-off in front month futures or a spike in longer-dated prices –Tchilinguirian suggests at this stage it’s anyone’s guess (our emphasis):

In the short term, there remains a great deal of uncertainty as to where the flat price may end up. Oil is likely to trade in a wide range over the next 3 to 6 months, possibly $65 to $85/Bbl. However, if weakness in the short-run fundamentals is not reflected in the flat price, the shape of the forward curve will still need to accommodate the underlying physical reality.

So if we do have a growing surplus in crude oil or products, as a result of the combination of a weaker than expected pace of economic recovery in advanced economies heading into 2010 and positive supply surprises, the nearby time spreads on the forward curve will need to change. Either the front price will need to weaken for someone to lift the oil, or the forward price has to rise to offset the cost of carrying oil forward in inventories, be it on on land or in floating storage, until such time demand can absorb the excess supply.

Either way, the contango will have to widen rather than narrow, delaying prospects for backwardation for the second half of 2010 when economic growth will be stronger, oil inventories lower and OPEC spare production capacity reduced.

Whatever the case, it’s clear commodity investors are becoming increasingly risk averse to the idea of a sell-off, says Tchilinguirian....MORE

From MarketWatch (Nov. 12):

What the obscure Vopak says about the oil market
The financial world isn't preoccupied with oil at the moment, not with issues like Goldman Sachs bonuses or Federal Reserve exit strategies to consider.

But it wasn't that long ago that oil was the number-one topic in the market, and should black gold resume prominence, the update on Thursday from a relatively obscure Dutch firm called VopaK (NL:VPK 52.93, -0.08, -0.15%) should be eyed.

Vopak is the world's largest independent tank terminal operator, so when it comes to storing oil, liquefied natural gas and the like, they know a few things.

And on Thursday, the group raised earnings guidance for the second time this year.

The reason? There are a few, but the main one is that demand for storing oil is strong.

A major reason to store, rather than sell, oil is if there aren't buyers for it. (Another would be a bet that prices in the future will grow significantly, but the futures complex at the moment is pricing in a 7% rise in 12 months and a 16% rise over five years -- hardly an irresistible siren song.)...MORE