Currently, OPEC is producing around 1 million barrels per day more than is needed, although so far there are few signs global markets are oversupplied with the Brent crude oil curve still in solid backwardation.
“We see little reason to expect a more substantial fall in the oil price despite the weak European economic outlook and substantial uncertainties regarding the US fiscal cliff,” says Filip Peterson, Commodity Strategist at SEB.
Conversely, Peterson says there is increasing evidence that the Chinese economy has stabilised and could start to accelerate somewhat again. At least, domestic implied oil demand recovered in October. On-going geopolitical tensions in the Middle East are also likely to continue to support the oil price. Finally, Saudi Arabia clearly targets a price of between 100 and 110 dollars per barrel.
Should it fall below 100 dollars, SEB’s experts expect to see a rapid reduction in Saudi Arabian oil production causing the oil price to recover fairly quickly.
With the last refineries now returning from pre-winter maintenance, supplies are being more promptly delivered, dampening product market sentiment generally. Timing is positive with below average European temperatures forecast going forward, a worrying situation in middle distillates if supply had still been restricted.
European oil inventories excluding naphtha are very low though reluctance to hold stocks over the year end for tax reasons has substantially reduced incentives to rebuild them. Product cracks have performed more divergently in recent weeks following the general downtrend as refineries began coming back on-stream from mid-October. Consequently, overall refinery economics have been relatively stable lately.