JEDDAH — On fundamentals, while the oil market continues to be fairly balanced, it points to market weakness in the months ahead, the National Commercial Bank said Monday in its October “Saudi Economic Review”. It noted that the supply side continues to face shortfalls with the North Sea, in particular, seeing several cargoes delayed in October, adding that though the trade-weighted dollar had intensified its losses since last month, losing 2.17 percent YTD, “we expect to see a rangebound movement in the coming weeks.” In addition, preliminary August data shows that total OECD commercial oil stocks dropped by 29 mmbd, and were 46 mmbd below the five-year average. In addition, the US latest data release shows a further decline in oil product inventories, with distillate inventories now 30.3 mmbd below their five-year average. While forward cover stood at a rather comfortable 58.4 days at the end of August, clearly tightening inventories are supporting prices. Since early October, oil prices have seen a divergence with Brent surging above $115/bbl as the situation in Syria has deteriorated. Crude oil markets drifted higher, departing from its relatively tight trading range. The balance between economic fears and the deepening of geopolitical complexity has been broken, with Brent prices surging by more than $6 over the past week. The upward momentum is driven by deepening of geopolitical developments, especially with rising conflict on the Turkey-Syria border, and tightening of inventories. The front month Brent contract surged above the $115/bbl mark, to levels last seen in mid September, and registered relatively stronger gains than the equivalent WTI contract. As a result, the prompt month WTI - Brent differential has continued to widen, settling above $23/bbl and reaching its highest value since October of last year. Meanwhile, the biggest market uncertainty is the production trajectories of Iran, and Iraq, NCB said in the report. Iraq produced 3.3 mmbd at the end September, the highest rate since 1979. In June it surpassed Iran as the second-biggest producer in OPEC. Iran can probably maintain a production level of 2.7 mmbd at the current level of sanctions. One unforeseen consequence of the sanctions has been to support prices, and in doing so soften their impact on the Iranian government. Yet, Saudi Arabia underlined that its crude supply at 10 mmbd is adequate for now, the report noted. In addition, the Kingdom reiterated its position to meet the market demands fully and to see Brent crude prices decline closer to $100/bbl. “On the demand side, OPEC's report raised its estimate for the call on OPEC crude by 220,000 barrel per day and 250,000 barrel per day for 2012 and 2013, respectively, despite lowering its projections for 2012 economic growth by 0.2 percent to 3.1 percent,” the report said. Demand continues to be subject to extreme uncertainty. The current unclear economic picture is making next year's oil demand growth forecast a difficult task, not only due to economic growth projections, but also affected by retail petroleum prices, and possible abnormal weather. While the sovereign debt issues of Spain and Italy, which constitute almost a third of the eurozone's economy, have so far been contained, risks to the global economy have increased as European policymakers continue to grapple with the ongoing debt crisis. Accordingly, excluding oil, prices broadly moved lower across the commodities complex, triggered by resurgence in macro pessimism, particularly focused on the growth outlook for China. Meanwhile, commodity trading posted lower figures as demand for raw materials faltered on the continued slowdown in global growth. Metals were largely impacted as copper posted its biggest weekly fall in two months as top consumer, China, which accounts for approximately 40 percent of global copper consumption, might have difficulty sustaining its current pace of buying. Copper has coasted in a range of about $8,100-8,400 a ton for the past month. Three month copper on the London Metal Exchange (LME) was last at $8,125 a ton. Gold posted its biggest weekly fall since June on the back of improved US consumer sentiment and improved jobs data. There some expectations that gold would rebound because of the ongoing euro zone debt worries. Gold fell nearly 1 percent last Friday. – SG
