Seeing the markets as sport
Singapore - Watching the Rugby World Cup quarter final
between New Zealand and Argentina made me think of how the weekend clash was
similar to JPMorgan's view on global oil markets.
Virtually every rugby fan would have expected the top-ranked
All Blacks to easily beat their South American opponents, but right up to
three-quarters of the way through the match the Argentineans were within
touching distance of New Zealand's score.
It was only in the last 20 minutes that the All Blacks
finally lowered the blood pressure of their fans by outclassing the Pumas.
So, what has this to do with JPMorgan and oil demand
The US investment bank isn't alone in forecasting that crude
prices are heading higher over the longer term, based on a combination of
modest supply increases and strong demand growth, mainly in Asia.
The bank expects Brent crude oil to average $115 a barrel in
2012 and $121.25 in 2013, levels about 8.4% and 14% above the current Brent
price of around $106.
The similarity to Sunday's rugby match is that we are
currently in the first three-quarters of the crude game, in that everybody
expects oil prices to rise over the coming months and years, but right now
things are not quite going to plan.
Just as New Zealand fans spent the first 60 minutes of an
80-minute match showing increasing signs of anxiety before their side
accelerated, oil bulls are currently able to discern all the reasons why crude
should be higher.
However, they are being stymied by a combination of factors
that have little to do with oil supply and demand fundamentals.
Perhaps some of this frustration came out in JPMorgan's
October 7 Oil Market Monthly, with the bank's analysts saying their forecast of
$121 a barrel for 2013 "will undoubtedly lead some to mark us with the
moniker of 'perma-bulls'."
It may be debateable as to whether JPMorgan, and indeed
several other investment banks, exist in a state of semi-permanent oil market
bullishness; however, their analysis of the global supply-demand situation is
Basically, the argument is that oil demand in developed
nations will drop slightly in 2011 and 2012 before being largely flat in 2013,
while developing world demand will maintain growth rates of close to 3% in 2012
and the year after.
On the supply side, JPMorgan expects producers to pump an
extra 2.6 million barrels a day by 2013, for a total output of 91 million
barrels a day, with more than half of this coming from the Organisation of the
Petroleum Exporting Countries.
This will only just keep the market in balance, and the lack
of spare capacity drives the expectation that oil prices will have to rise by
the end of 2013.
Obviously, a serious recession in Europe, prompting a global
slowdown, will undermine any bullish view of oil prices, but this is still not
the most likely scenario.
If anything, analysts may be too cautious on Asian demand,
especially that from China.
As can be seen from Chinese oil imports during the 2008
global financial crisis, any decline is short-lived and leads to higher demand
in subsequent months.
Even a renewed recession in the West won't be enough to halt
the inexorable industrialisation of China, and that can only mean rising crude
demand from the world's biggest commodity consumer.
This should be confirmed this week with the release of
China's September trade data, with an increase in crude imports likely given
the return of refineries from maintenance and the possibility of lower oil
prices causing some inventory restocking.
Imports may also be boosted by lower domestic oil output, as
the shutdown of the largest offshore field cut production 7.2% to 3.62 million
barrels a day in September.
Over the longer term China may struggle to boost domestic
output much, meaning an increasing reliance on imports, a further bullish
factor for global oil demand.
Finally, China cut retail prices for gasoline and diesel by
about 3% on October 8, the first change since prices were raised to a record
high in April.
While this may not stoke demand by much, it will help
inflation ease further and do a little bit to ensure China's industrial output
remains solid, even in the face of weak growth in the nation's main export
But all of the positive demand and crimped output stories
matter very little when the oil market is hostage, along with other asset
classes, to every twist and turn of the European sovereign debt saga.
Given that the Brent curve is currently backwardated, with
December 2013 futures some $9 a barrel cheaper than the front-month contract,
buying the long end of the curve would be a good idea if you subscribe to the
bullish view that the oil market will inevitably tighten, driving up prices.
Like Kiwi rugby fans had to against Argentina, oil bulls
will simply have to maintain the faith for a while before their forecasts
should win through.
* Clyde Russell is a Reuters market analyst. The views
expressed are his own.