PETROLEUM_POLITICS_AND_ECONOMICS：WHISPERS_IN_THE_WIND：WHAT_HAS_2013-2013-01-25.ppt

commodities research 24 january 2013 petroleum politics and economics whispers in the wind: what has 2013 told us so far? paul horsnell +44 (0)20 7773 1145 miswin mahesh +44 (0)20 7773 4291 crude oil prices have drifted higher, moving above the recent tight trading ranges, and we expect that movement to gain pace. the brent-wti spread has narrowed, albeit less than our forecast for the quarter as a whole, but remains volatile and prone to upward spikes. we expect a slower pace in developments around the iranian nuclear issue, while oil market attention shifts to a proliferation of other complex and sometimes interrelated geopolitical stresses. a sharp fall in refinery runs has brought the us oil product market back into a finer balance after the large surpluses of december. us gasoline demand indications remain positive, while implied distillate demand is weak. figure 1: saudi arabian crude oil output, 2008-13, mb/d. 10.5 10.0 9.5 9.0 8.5 8.0 7.5,08,09,10,11,12,13,source: jodi, opec secretariat please see analyst certifications and important disclosures starting after page 40,2,barclays | petroleum politics and economics commentary whispers in the wind: what has 2013 told us so far?,brent prices have set new three-month highs, although the upwards momentum remains muted the brent-wti spread has narrowed in 2013, but remains highly volatile a potential for less urgency in policy responses to iranian nuclear issues,the year is less than four weeks old, so it is perhaps not surprising that no dominant price dynamic or fundamental trend has yet emerged. however, there are already some clues, even if they are so far just whispers in the wind, vague shapes in the mist or some writing on the water. in terms of price dynamics, both brent and wti have already stirred. brent has drifted above its recent tight range, although the break to the upside has yet to gain any magnitude or momentum. we have in previous reports noted the seemingly magnetic attraction of the $108 to $111 range for brent, such that the front month contract traded in that range at some point on all bar one of the final 51 trading days of 2012. prices have now moved a little above that range, with brent reaching a three-month settlement high of $112.80 per barrel. however, if we are a little more generous with the width of the dominant trading band, prices still look fairly range-bound. if one considers the band $2.50 either side of $110 per barrel, then prices have been within that $5 wide band at some point on each of the past 68 trading days, ie, on every day since 18 october. in other words, it does not look like a decisive break to the upside just yet, although we still expect that to come. in terms of price forecasts, we had expected the brent average to rise $9 in q1 from the q4 average of $110 per barrel. thus far, it has been slow progress, with the quarter-to- date average at $111.60 per barrel and the current price close to $113 per barrel at the time of writing. the average is at least going in the forecast direction; however, the pace of rise in january has been slower than expected. for the past two years, $111 per barrel would have served as a very good forecast for all annual and quarterly averages, and thus far in q1 it seems that a flat $111 per barrel expectation is still holding up reasonably well, and it will continue to do so until prices gain more momentum than they have achieved thus far. in terms of the brent-wti differential, the forecast is looking more robust. our expectation was for the spread to move in from the q4 average of $22 per barrel towards a q1 average of $14 per barrel. the quarter-to-date average for the first comparable month spread is $17.50 per barrel, which represents a reasonable degree of tracking this early in the quarter, and the spread has traded as low as $15 per barrel. however, the announcement of a problem with the seaway pipelines connection at jones creek, texas, drove the spread back above $17.50 per barrel on 23 january. while that problem may not constrict seaways flow very significantly beyond the current month, the incident does illustrate the potential sensitivity of wti to pipeline and refinery glitches, as well as to positive domestic supply surprises given the high level of crude inventories at cushing, oklahoma. while we would reiterate our $14 per barrel forecast for the average spread in q1, we would caution that the room for manoeuvre in the case of shocks is relatively limited, and the tail-end outcomes do appear to be heavily skewed to higher spreads. in other words, the effect of the more unlikely, but still feasible, unexpected events is more likely to result in a spread $5 wider than our forecast rather than $5 narrower. the whispers on the wind for price dynamics have, thus, so far indicated a higher range for brent and a tighter wti-brent spread. for the geopolitical context of the oil market, the early signs have been more ambiguous. on the one hand, the timetable on the next evolution of,the iranian nuclear issue does seem to be lengthening, while on the other hand the number of other potential geopolitical stresses has expanded. the more hawkish elements of netanyahus policy on iran now appear to be more contentious positions within the military establishment and political consensus than they did three months ago, and the policy gap 24 january 2013,3,barclays | petroleum politics and economics with the us appears wider. the new key officials in the us administration are, on the whole, likely to be no more hawkish than their predecessors, and look set to take a relatively careful and pragmatic approach to the issue. on the iranian side, particularly now that crude production levels appear to be climbing gradually back towards 3 mb/d, there is a clear incentive to play the long game, at least as far as internal policy differences will allow. in short, two of the main sets of actors seem less likely to force the issue imminently, and there are some additional constraints on policymakers seeking to accelerate outcomes. overall, while the issue is far from having been defused, the probability tree of outcomes does appear to have become larger and potentially stretches further out in time.,a multiplicity of complex and sometimes interrelated geopolitical risks large implied stock builds in some balance calculations may be affecting producer policies,while the iranian nuclear issue may seem more immediately benign, although still very much alive, that is perhaps the only stand-out piece of positive geopolitical news in the context of the oil market in 2013 so far. elsewhere, the geopolitical context has grown more complex, interrelated, and potentially more stubborn. the existing sources of geopolitically related production losses have shown little or no improvement yet. sudan and south sudan have not made as much progress as might have been expected in their prolonged attempts to get their oil output moving again. syria appears a more entrenched situation, indeed one that might become a source of wider instability for an extended period. likewise, the situation in yemen has also shown no particular improvement, and the divisions involved as well as the threats to yemens energy infrastructure have become more overt. the further deterioration of conditions in the sahel has added another layer of complexity, producing greater concern about the integrity of energy export systems across north africa. as well as their gas exports to europe, algeria and libya combined produce about 3.5 mb/d of oil liquids, ie, more than either iran or iraq. given that, recent suggestions from government circles in london, paris and washington that north africa might become a theatre for conflict in the mould of afghanistan, and potentially for an extended period, do appear to represent a potential watershed in the evaluation and pricing of supply security in the region. when the less-than-constructive direction of travel of outcomes in a further raft of countries, and most particularly iraq and nigeria, is factored in, the result appears to be a more unsettled geopolitical backdrop even if iranian issues are in a hiatus. at this point, we would assess that very little of this additional geopolitical complexity has been priced into the oil market, although at the margin we detect somewhat more reluctance to short the market aggressively given a seemingly growing sense of geopolitical unease. the final of the main whispers so far in 2013 relates to producer policy. in our view, the key producers were likely to have been somewhat surprised as to quite how easy 2012 turned out to be, despite harbingers of doom at the start of the year. for example, saudi arabia,produced the highest volume of oil liquids for more than 30 years, even as prices reached their highest annual average. given that this occurred at the same time as weak oecd gdp growth, a severe chinese oil demand slow down and a boom in us oil supply, the result seems even more fortuitous. the reason the year was relatively easy for most opec producers was the high rate of geopolitically related outages, including iran, the weakness of non-opec supply outside north america and the robustness of demand in emerging markets outside china. in other words, everything really did come out in the wash, in that the negative factors all had offsets elsewhere. however, it would seem reasonable that producers may feel that this degree of serendipity in outcomes cannot be relied upon again. this is likely to be particularly true given the estimated global balances shown in figure 88. the two sets of forecasts that would tend to have the greatest influence within opec, namely the opec secretariat and the iea forecasts, both show an implied global stock build of 1.1 mb/d in 2012, ie, some 400 mb of surplus oil. given that, the natural precautionary policy reaction would be to trim output so as not to allow any further chronic surplus to develop. that, plus forecasts of a fall in the call on opec crude in 2013 and seasonality in domestic demand, seem in combination more than enough to explain the reduction in saudi crude output back to middle of the recent range as shown in figure 1. 24 january 2013,sharply,4,barclays | petroleum politics and economics,we expect that large 2012 implied stockbuilds will be revised away,there is, however, a further aspect to the nervousness among producers created by the large builds implied by the iea and the opec secretariat for 2012. in short, it may be misplaced. in our balances, as also shown in figure 84, the implied build is far more marginal. indeed, at 0.4 mb/d all of that build could be accounted for by increases in emerging market operational inventories given the higher demand baseline, plus strategic stockpiling net of reductions in oecd operational inventories. we do not detect any actual surplus overhanging the market from 2012, and, outside the us midwest of course, time spreads are also not signalling the presence of any growing surplus of crude at the margin. further, as a further observation the eia balances for 2012 resolve themselves with a slight implied decline in inventories. we strongly suspect that the 400 mb surplus from the iea and opec secretariat balances may prove to be an illusion, and will be resolved over time by the combination of higher demand estimates and lower non-opec supply estimates. figure 1 implies that producer policy remains risk averse, but that it is using full information from the main two sets of global balances, and that implies to us that the market is probably a little tighter than is generally perceived. we expect a fairly balanced market in q1, with the main imbalance for the year starting in q3 following a strong seasonal rise in demand in that quarter. overall, the early whispers on the 2013 balances suggest to us that fundamental price support is likely to remain robust, save in the case of a significant macroeconomic discontinuity, and despite a further strong rise in us oil supply (see figure 89). figure 2 eia weekly data release summary, mb,18 jan 2013 crude oil gasoline total distillate heating oil diesel jet kerosene residual fuel oil unfinished oils other oils total commercial inventories,inventories 363.12 233.26 132.94 23.41 109.52 39.80 34.91 84.05 213.17 1101.24,1 week change 2.81 -1.74 0.51 -0.34 0.85 -0.64 -1.30 2.05 -4.34 -2.64,4 week change -7.94 10.15 13.55 -2.81 16.35 1.18 -1.92 1.73 -15.02 1.72,1 year change 28.3 6.1 -12.6 -8.7 -3.9 -1.6 1.9 6.5 25.2 53.8,difference from 5 -year average 41.7 14.3 -14.9 -16.2 1.3 -1.2 -1.9 5.1 27.2 70.3,source: eia, weekly petroleum status report,us refinery runs have fallen,the latest us weekly data release shows a strong fall in refinery runs back to their five-year,average level, (see figure 34) as seasonal maintenance plus a few outages are reflected in the data. runs fell by 0.9 mb/d to 14.21 mb/d. helped by a further compression of imports, (see figure 33), crude oil inventories rose by just 2.8 mb, which is very close to the five-year average change for this week. cushing inventories fell by 0.47 mb to 51.39 mb (see figure 32), with the decline from the previous all-time high being due to a week of seaway expansion before the latest contraction in its throughput. gasoline inventories declined by 1.74 mb, which might be considered somewhat disappointing given the scale of the decline in runs, but does at least represent a potential turning point, somewhat earlier than the usual seasonal peak (see figure 37). while heading towards its seasonal low (see figure 60) gasoline demand has maintained a y/y gain, with january-to-date currently showing a 1.5% increase. the indications for distillate demand are far softer, with the y/y decline now estimated at 12% following a sequence of weak readings (see figure 63). diesel inventories rose for the eighth straight week and are now converging onto their five-year average (see figure 44). overall, following the rush of surplus oil products in december (see figure 53), the latest data release indicates a mild tightening of products at the margin given the start of large-scale refinery maintenance. 24 january 2013,5,barclays | petroleum politics and economics,the past is another country,last week we left you with the latest in a long line of david bowie themed questions, giving,you two lists of five names and asking who was the odd one out in each list and why. the first list was kiefer sutherland, christopher walken, dan aykroyd, jane seymour and david bowie. this was all about eyes, or to be specific people whose eyes have different colours, a condition known as heterochromia. jane seymour, for example, has one green eye and one brown eye. the odd one out in the list is david bowie. all the others were born with heterochromia, while bowie has acquired heterochromia in that his eyes look different due to a childhood accident that left one pupil dilated. the second list was john lennon, rudyard kipling, aldous huxley, paul weller and david bowie. the link for this list is medals and awards, and specifically british honours. the odd one out is john lennon, as all the others turned down honours, while lennon accepted one but then handed back the medal later. david bowie has turned down the offer of both a cbe and a knighthood. incidentally, the artist ls lowry holds the record for the most honours declined at an impressive five, namely obe, cbe, knighthood and companion of honour (twice). for this week, who links the al hambra with ankara and niagara, and also with a song that shares a characteristic with the theme tune from inspector morse? 24 january 2013,6,barclays | petroleum politics and economics commentary on other weekly data,crude prices drift upwards with brent at a three-month settlement high. the us national average gasoline price continues a muted rise, while the decline in colorado enters a fifth month us oil drilling rises from its nine-month low,the key characteristic of crude oil markets thus far in 2013 is that they have been almost as range-bound as they were in late-2012, albeit at a slightly higher level. however, there has at least been a more pronounced, but not spectacular, upwards drift over the past week, with front month brent managing a higher high or a higher low (and sometimes both) on each of the past six trading days (see figure 5). indeed, in trading above $112 per barrel throughout 23 january, brent spent a whole trading day more than $1 outside the $108 to $111 range for the first time since 17 october. over the past week as a whole, march wti rose by 55 cents to $95.23 per barrel. march brent gained $3.12 to $112.80 per barrel, having traded over the range from $109.45 to $113.15. at the back of the exchange-traded curve the price of brent blend for december 2019 delivery rose by 68 cents to $89.65 per barrel. by 22 january the value of the opec basket had gained $1.73 to $109.48 per barrel, while in euro terms it rose by 0.88 to 82.15 per barrel. in tokyo, the february average dubai/oman contract gained 1,100 to 59,990 per kilolitre. north sea time spreads have risen sharply (see figure 8), with the backwardation between march and april brent gaining 32 cents to $1.11 per barrel. in the us, the march to april contango widened by 15 cents to 52 cents per barrel, with most of that move occurring on 23 january following the emergence of a constraint on the seaway pipeline. the seaway blip and the associated relative down force on wti helped propel us oil product cracks up from the previous weeks three-month lows. over the past week as a whole, february gasoline futures rose by 11.24 cents to 283.38 cents per gallon while february heating oil futures rose by 7.90 cents to 307.81 cents per gallon. the march gasoline crack rose by $4.09 to $24.42 per barrel, and the march heating oil crack rose by $2.51 to $