We foresee no double-dip, but a weak recovery instead

As the market acknowledges that financial and sovereign balance sheets will take time to repair, a deceleration in global economic growth seems very likely. In this context, correlations between commodities and other asset classes are likely to break down. Large macro moves could now give way to micro-driven markets. In this environment, OPEC’s best bet to keep control of prices is to normalize stock levels across the oil market. Perhaps not surprisingly, most energy spot prices are now roughly in line with the normalized forecasts we made several months ago.

OPEC cuts, economic uncertainty are sparking a curve shift

Signs of normality are starting to show. For example, the August Brent ICE contract expired at a premium to the September contract. While the inventory data does not match the rapid move in timespreads, we see spreads moving ahead of actual stock draws. No doubt, tighter crude oil timespreads are a seasonal phenomenon related to the refining and oil field maintenance cycles. But a counter-seasonal drop in OPEC output has contributed to tighten oil timespreads as well. The cartel seems to have recognized the risk of a negative demand shock on a high inventory environment. Meanwhile, non-cartelized oil producers have also become concerned with the slower outlook for global economic growth.

The WTI crude oil curve could potentially flatten further

Increased interest in producer hedging in 2H2010 due to a blurry economic outlook could combine with ongoing supply glitches and seasonal patterns. A marked seasonality in the WTI crude oil put skew suggests that producers tend to hedge in late summer months. Seasonal hedging activity and an uncertain outlook could continue to alter the term structure of the WTI and Brent crude oil markets. In short, with inventories potentially moving back to their 5-year average and producers and consumers becoming equally concerned about price direction, the WTI and Brent crude oil curves could potentially flatten further.

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Research report