Energy: Crude oil prices remain strong despite weakening fundamentals
Apart from gasoline, energy prices traded lower during the week. Crude oil prices lost some ground on Monday and Tuesday. However, prices rebounded strongly following the release of the weekly US petroleum inventory data by the US Department of Energy (US DOE) on Wednesday. Despite the much larger-than-expected increase in US crude oil inventories, traders focused on the sharp decline in US gasoline inventories that was well above consensus.
The low refinery rates, which are still hovering at very depressed levels of around 82%, are now putting some pressure on gasoline inventories. However, gasoline inventories in the USA are still well above average and we expect refineries to keep production low until we see clear improvements in refinery margins. WTI and Brent crude oil prices are trading slightly lower at around USD 105 and USD 103, respectively. US gasoline prices have been increasing during the week and are now standing around USD 2.73 per gallon. Heating oil prices lost some ground and are now trading around USD 2.95 per gallon. Natural gas prices declined slightly during the week and trade around USD 9.40.
In our view, the current strong prices above USD 100 are not justified by fundamentals. Over the last two months, implied crude oil demand has been considerably below last year’s levels. Moreover, OPEC production, as well as non-OPEC crude oil production, has been increasing. On balance, this saw crude oil inventories in the USA rebound sharply. The strong build-up in US crude oil stocks and the contemporaneous weakening in US implied petroleum demand drove days of crude oil supply (measured as the ratio of US crude oil stocks to four-week average US crude oil refinery inputs) higher.
In our view, the supply situation in the USA is now back to considerably more comfortable levels at above 22 days of supply. Nevertheless, crude oil prices continued their upward trend that they started in January 2007. In our view, sharply falling days of supply since mid-2007 supported this rally until the end of last year, when they reached their low. Since then, liquidity inflows as well as the weakness of the US dollar have been driving crude oil prices even higher despite this weakening in fundamentals. Thus, the latest price increases have in our view little to do with the supply/demand situation that currently prevails in the market.
This weakening in fundamentals should in our view put some pressure on crude oil prices over the short to mediumterm. However, the weakness of the US dollar and liquidity inflows might lead to further overshooting of crude oil prices. Consequently, while a correction in our view is very likely, especially if we see a halt in the US dollar depreciation or even an appreciation against the euro, investors must be aware of the current high volatility in the market.
source: CS | |