Further rise in oil prices stymied by uncertainty over timing of recovery

China (Platts) -- June 30, 2009

By reporters at Platts, the energy information division of the McGraw-Hill Companies. For more information about Platts' information products in China, contact Platts at china@platts.com, or call its representative office in Guangzhou at (+86) 20 2881 6588.

Global crude oil benchmarks hovered just below $70/barrel last week after having briefly broken out of this level the previous week.

By Friday (June 26), WTI and Brent closed at $69.16/b and $68.92/b, respectively.

Prices have almost doubled since touching bottom early this year but have failed to advance further in recent weeks due to a lack of consensus on whether the global crisis is in its final stages.

On the one hand, the OECD was widely reported last week as saying that the global economic slowdown is approaching the bottom and that prospects for a recovery in 2010 have recently improved.

But at the same time, the World Bank also reportedly said last week that the world may be entering a new era of sustained low growth.

This follows a more drastic estimate of the global contraction this year by the World Bank, which now expects global GDP to shrink by 2.9%, compared to its earlier estimate of 1.7%.

The new figure takes into account an estimated 4.5% contraction among developed countries and 1.2% growth among developing nations.

Further gains were also frustrated in part by news that the US Federal Reserve decided to maintain virtually zero interest rates amid a "weak" US economy.

Recently released statistics have not supported the notion that either the US or global economies are at a decisive turning point.

"[Crude oil prices] appeared more influenced by weakening equity markets than by a weakening dollar," independent energy analyst Jim Ritterbusch said in a report. "This push and pull off a mixed bag of financial guidance has typified the energy trade this week, but has provided enough support to the crude oil to encourage continued speculative flows into the long side."

WTI had rallied last Thursday largely on news of oil production losses and refinery closures in Nigeria.

"With once ailing spare production capacity on the mend, a supply disruption from even as large a producer as Iran could be more easily absorbed by the market than during the recent rally, unless expectations of economic growth undermine the perception of a safety cushion," Antoine Halff, energy analyst at NewEdge, said.

Brent-Dubai price spread inverts as China consumes more sour crude

In related news, Asian benchmark Dubai has been driven above Brent prices on several occasions in recent weeks due to a combination of strong demand from China for sour grades of crude and the fact that OPEC's recent production cuts have been deeper for sour grades than for sweet grades.

The reversal in the relationship between the two benchmarks was witnessed on four occasions since early June, a highly unusual occurrence.

Dubai for August loading ended the session in Asia last Friday at $70.75/barrel, 28 cents higher than a shipment of Brent lifting in the same month.

The Brent/Dubai physical cargo spread was minus 42 cents/barrel on June 25, and also inverted on June 16 and June 23, when it was minus 12 cents/b and minus 25 cents/b, respectively.

Usually, Brent, a low sulfur "sweet" grade of crude, trades at a premium over the lower grade Dubai, a benchmark for sour grades.

The frequent price is due to increased demand in the face of tightening supply for sour grades of crude.

"Sour crude is super tight," said one trader in Singapore.

Rising Chinese demand and a tendency by OPEC members to cut production of heavy, sour grades rather than light crude to meet the cartel's lower output quota this year was boosting Dubai.

Chinese refiners' crude throughput hit an all-time high of 31.19 million mt (7.37 million b/d) in May, according to Platts estimates based on recent figures released by the Chinese government.

China in recent years has embarked on a program to boost its secondary refining capacity to handle increasingly heavy and sour grades of crude that it is importing from various oil producing countries under long-term supply contracts.

Meanwhile, cuts in monthly crude volumes from OPEC countries to term customers in Asia this year by as much as 15% in some cases have encouraged spot cargo buying of other Middle East grades and in turn boosted benchmark Dubai, traders said.

Updated: June 30, 2009

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