| Man: Spotlight on Oil |
| 18.11.11 16:51 | |
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At the end of October, for the first time since the financial crisis in 2008 the price curve of West Texas Intermediate (WTI) has flipped into backwardation. This effectively means that costs for immediate deliveries are higher than future contracts. One explanation for the shift of WTI futures into backwardation might be found in the fact that a big part of the oil currently stored in the world’s largest oil storage facility in Cushing, Oklahoma is of poor quality (off grade). The stronger than expected demand combined with the loss of production from the Middle East, namely Libya, contributed to falling inventory levels in the US recently. Despite the weak economy in the US, demand is higher than it was this time last year mainly triggered by the strong growth in the developing countries. On the supply side it was reported that global production in the 3rd quarter of this year was at 88.68 million barrels a day while demand was higher with an estimated 89.21 million barrels a day. Adding to Libya’s outage, the IEA (International Energy Agency) raised concerns about Saudi-Arabia’s ability to produce enough oil, initially it should have been 12 million barrels a day, it now looks more like 10 or 10.5 million a day. Usually we can see inventories build up during the 3rd quarter of the year (generally due to the fact that US driving season is over, heating season hasn’t started yet, etc.). The deficit at this point is interesting as this strongly points towards the fact that we have entered a period of structural deficit in crude oil earlier than expected. After the spread between Brent and WTI reached a high of almost USD 30 per barrel in early October due to on-going supply issues related to the North Sea region, Libya as well as Nigeria, it has now eased off and we think it’ll narrow more as crude oil output resumes in Libya and the North Sea production recovers. Additionally the spread should further decline as new ways are found and are respectively implemented to get the US landlocked oil more easily transported. Ø Structural deficit The IEA (International Energy Agency) fears a structural deficit starting earlier than expected (initially anticipated for mid-2012). This deficit results from Libyan production problems and higher than expected global demand for oil. Ø Supply shortage The inability to move WTI from Cushing down to the Gulf of Mexico combined with supply problems in Libya, the North Sea, Angola, Nigeria, Azerbaijan and elsewhere amounted to an imbalance in the market and WTI-Brent spread widening. Once these production issues are resolved the spread should decline again as we were already able to observe in early November. Ø Strong demand despite weak economic growth Despite the weak economic situation in Europe and the US we see continued strong growth and thus high demand in non OECD countries. This suggests rising oil prices in the short to mid-term future. About Man Man is a world-leading alternative investment management business. It has expertise in a wide range of liquid investment styles including managed futures, equity, credit and convertibles, emerging markets, global macro and multi-manager, combined with powerful product structuring, distribution and client service capabilities. As at 30 September 2011, Man managed $64.5 billion. The original business was founded in 1783. Today, Man Group plc is listed on the London Stock Exchange and is a member of the FTSE 100 Index, with a market capitalisation of more than £2.5 billion. Man is a member of the Dow Jones Sustainability World Index and the FTSE4Good Index. Man also supports many awards, charities and initiatives around the world, including sponsorship of the Man Booker literary prizes. Further information can be found at www.mangroupplc.com |
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