This note was published by Lou Gagliardi, Managing Director of Energy, on Friday afternoon; we think it is pertinent to all Macro clients.
Is it safe to buy oil here? The short answer is NO! Global growth (and demand) continues to slow.
Product demand – globally and in the U.S. – continues to deteriorate; this coupled with the return of Libyan supplies near the end of 4Q11 will dampen crude prices over the intermediate-term TREND duration.
Over the immediate-term TRADE duration, weak demand will be the single major suppressant to crude price, as the summer driving season winds to a close and U.S. liquids production continues unabated. In short, absent any additional monetary stimulus that weakens the U.S. dollar, we don’t see much crude price support.
Crude supplies from Cushing have been declining over the last several weeks due less from demand and more from refiners being opportunistic to run throughputs to capture higher margins driven by the wide WTI/Brent spread that is roughly $26/bbl, though that tailwind is abating as refiners will soon transition to produce more middle distillates before winter. Refiners will begin to shut down for winter maintenance to prepare for the winter heating oil season. Greater refining downtime/maintenance will mean less crude drawdowns, which will be interpreted as even greater demand weakness. But that weakness in demand is real – gasoline demand remains weak into the end of August and early September, down ~3% YoY.
Reports out today, that resumption in Libyan crude exports/production may reach 1 MM b/d within 6 months, with full production of 1.6 MM b/d of production within 15 months. We believe this is slightly on optimistic side, however, directionally correct. We can expect Libyan light/sweet bbl to gather momentum by end of 4Q11 into 1Q12 of several hundred thousand b/d of production and picking up steam from there.
Following close behind is the IEA having recently reduced its forecast for global energy demand; in fact, it has been ratcheting downward since the beginning of the year – no surprise here as they are late movers, and often error on the high side, so conditions may be worse than theirs forecast indicates.
One last data point, when I go through my GDP/global wellhead production model, the gap between the growth in each metric for 2011 and 2012 is well below the marker of 200 bps that has historically indicated tightening upward pressure on crude prices. Simply put, the slope of global GDP growth and wellhead production is decelerating, and the tailwind of monetary stimulus appears to have run out of steam. Indeed, if global GDP is under a 3% per annum clip for 2011 and 2012, which right now it appears to be, demand pressure on price will remain weak into 2012.
From the Oil and Gas Patch,
Lou Gagliardi
Kevin Kaiser
