WTI prices .. when will NYMEX reach $100?
The big boys (Goldman Sachs, Morgan Stanley, Deutche Bank, etc.) called for WTI prices to reach $100 per bbl in 2011 in February 2010. Even though crude oil prices were well below levels that would encourage a view this bullish, we have to pay attention when serious money talks.
After the financial crisis in Greece, crude oil prices fell sharply during May 2010 and we didn't hear the steady beat of bullish drums until late in the year. Instead, during May through August 2010, crude oil prices were range bound in the $70-80 per bbl range. Prices broke out of this established trading range in September and we've seen what the bullish view is capable of doing. We note that WTI prices reached $90 per bbl despite bearish trends in U.S. crude inventory, seasonally bearish trends in U.S. refinery crude runs and nominally bearish seasonal trends in gasoline supply/demand balances. Despite all these "bearish" factors, big money private traders in the NYMEX became unrelentingly bullish. They hardly paused to have Thanksgiving dinner with their families and must have hired personal shoppers to do Christmas shopping.
We note that China experienced significant shortages of diesel fuel in 2010 (perhaps beginning in Aug/Sep). U.S. refining companies began to aggressively export distillate fuel oil in the second half of 2010. Although EIA weekly statistics provide a reasonable view of trends in domestic supply/demand balances for crude oil and the major refined products, EIA does not, as yet, publish any detailed break-out of U.S. exports of refined products. From an analytical perspective in the current environment, we need weekly details on exports of distillate fuel oil in particular. U.S. refineries in the Gulf Coast and West Coast will become much more internationally focused during the coming years and a 2 month lag in export statistics is no longer acceptable.
Based on our current analysis of global crude oil production and demand, we see three important trends. First and probably most important, the key crude oil exporting countries in the Middle East (Saudi Arabia, Kuwait, and U.A.E ) continue to maintain reasonable strict production discipline. Second, the rate of decline in North Sea production has seemingly accelerated and supported very strong premiums for date Brent vs. WTI since September 2010. Finally, based on reports of demand growth in China, China by itself has the capability to increase global demand by 1 million bpd -- unless declining demand in North America and Europe is enough to offset -- and the nascent economic recovery make this unlikely during 2011-2012.
Finally, in the detailed CFTC statistics on the NYMEX crude contract, we see further reason to remain bullish for WTI prices for the first half of 2011. Swap dealers, who represent pension fund money, were historically and consistently net long. This class of NYMEX traders, however, shifted into net short positions during Q4 2010. Perhaps, pension fund money will remain on the sidelines due to the risk of significant declines in prices if/when large private money traders decide to liquidate long postions and take profits.
We forecast WTI NYMEX prices to reach a $100 per barrel average by April or May 2011.
