Sunidhi November Crude Oil Report

Crude Price Outlook We believe that Nymex Light Sweet Crude prices are likely to edge lower significantly before we can see fresh demand emerging. The arguments may be summarized as below:

Slowdown in global economy has resulted in downward revision of oil product demand in 4 th Quarter going through 2008.

The US Dollar weakness story should come to an end looking at the OECD CLI Indicators; which is likely to reverse the commodity price gains attributable to the US Dollar depreciating currency risk and soon we may see the US Dollar regaining strength and wiping away the commodity gains.

Prices are expected to edge below $80 by the second week of December as demand is likely to freeze at the revised lower estimated levels or perhaps further downward revision cannot be ruled out exerting more downside pressure on prices. The Fed interest rate decision and the outlook there on by second week of December makes us stick to the time frame.

Global oil demand in the fourth quarter was REVISED LOWER to 87.1 million barrels per day down by 500,000 barrels per day from the previous estimate and averaging 85.7 million barrels revised lower by 200,000 bpd (+1.2% over 2006) from a year ago, the International Energy Agency (IEA) said in its monthly report of November 2007. Prices shot far beyond our target of $90 per barrel target (recommended at $83.02) to test a high of $98.62 primarily due to US Dollar weakness when the demand supply fundamentals remained in the back-door. In this report we envisage the impact of lower demand estimates, the emerging demand supply situation and the price outlook there on.

Background: In our last report dated 13 th October (when quote was at $83.08) with a price target of $90 by the 2 nd week of November was surprisingly tested on the 8 th day from the day of issue of report making a high of $90.02 for the November expiry on the New York Mercantile Exchange.

The arguments offered in our report were:

  • Demand from the US has not shown any signs of decline as yet even after the turmoil from the sub- prime mortgage market.
  • Weather Risks remain too high.
  • Supply side remains constrained from the OPEC group countries.
  • Inventories with OECD countries continue to shrink.
  • US Dollar weakness is also propelling crude prices higher.

Actual reasons contemplating sharp rise in price were attributable to:

  • Threat of oil supply disruptions on possible attack by Turkey at the Iraq border.
  • Added weakness in US Dollar since the release of report due to bad set of economic releases.

1. There were heightened speculations of a possible supply threat to the oil exports from Iraq, when Turkey got the formal accord from its Parliament to launch military attack on Kurdish rebels taking refugee in the hide-outs of Northern Iraq. An attack in the Northern Iraq border may result in shutting down a key pipeline that runs from the Kirkuk oil field in Kurdish northern Iraq to the port of Ceyhan on Turkey’s Mediterranean coast and hurting the oil exports and shipments from the region. The pipeline gives Iraq an access to the world market for exporting some 300K barrels of oil per day.

2. Persistent weakness in US Dollar since the release of the report had precisely been the factor responsible for the sharp escalation in Crude oil prices. We have also discussed the inverse co- relation between US Dollar and the Crude oil prices in that report.

A falling dollar pushed oil prices higher because oil-producing countries sell oil in dollars and often buy goods in euros.

Highlights of the IEA Monthly Report dated 13 th November 2007

  • Fourth Quarter oil product demand estimates are revised lower by 500,000 bpd
  • Overall average 2007 oil product demand revised lower by 200,000 bpd
  • A substantial jump in world oil supply of 1.4 million bpd in the month of October
  • OPEC production increased by 410 kb/d to 31.2 million bpd

Apparent Changes in Demand Supply Gap after the revision in estimates On the release of estimates during October there was an apparent gap of 2.5 million barrels per day which after the revised lower estimates in November, the apparent gap shrinks by 76% to 0.6 million bpd. This can potentially significantly ease the draw down of stocks from the reserves. Thus the improving supply situation combined with lower oil product demand is likely to take away any upside pressure on the prices.

The impact of Global economic slowdown OECD countries consume roughly 48.6 million bpd of oil products accounting for 58 percent of the global oil consumption during 2006. An upheaval or downturn of economic activities cannot seclude the commodities consumption growth/decline unless an appraisal for these OECD countries is taken into account. As per the latest estimates released by the OECD, the major OECD countries are likely to witness a noticeable downturn in the economic activities during the coming months. Composite Leading Indicators (CLI) based growth cycle indicate turning points in the economic activity roughly six months in advance. The graphs below depict a fair picture for the region which is likely to witness a major slowdown in their economic activities.

The reading of OECD CLI: Expansion: CLI Increasing and above 100, Downturn: CLI decreasing but above 100, Slowdown: CLI decreasing and below 100; Upturn: CLI increasing but below 100

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