Morning Petrospective – May 25, 2011

rude oil prices moved back up again on Tuesday, touching a high just above $100 a barrel as Goldman Sachs and Morgan Stanley both came out with revised objectives higher in oil. We are not sure what they are looking at, but they must either expect fears of inflation, a weak dollar or maybe even better demand. We are not sure where better consumption might come from, but they seem to be expecting seasonal strength to combine with cyclical resurgence. Without help from the Fed, it looks tough to us.

Of course, both investment banking houses have much closer ties to the Fed and to the US Treasury than mere mortals looking at factors like sufficient supplies and anemic demand in a reluctant economy. They may know that the Fed will ride to the rescue with a “QE3.” Our assumption of weaker oil prices is predicated on a heavy political price to be paid for any hint of QE3. The Fed had $1.4 trillion in reserves that could come into play, instead. It makes us very suspicious when these big, well-connected investment banks tell us to buy something when it makes no sense.

Goldman believes spare capacity will be under pressure as economic growth increases demand. The investment bank sees Brent at $115 in three months, $120 in six months and at $130 a barrel in 12 months. That would all but derail the recovery here in the US, unless the Fed comes up with a new quantitative easing program or something like it.

Morgan Stanley raised its forecast on Brent to $130 in 2012, from $105, because “fundamentals have improved markedly over the past year owing largely to an improvement in demand, and more recently on lost production [from Libya].”

For two companies who effectively led the global movement to buy oil as an asset class, based on fears of inflation and a weak US dollar, to couch their bullish sentiments in the language of fundamental analysis is almost a slap in the face to fundamental supply & demand-influenced traders. If they are really bullish instead of trying to shake out buying they can sell into, then they learned something from the Fed, something it plans to do that will suddenly make oil attractive again as an asset class. These guys really don’t care about the fundamentals, or have not cared about them for nearly five years. They either know something we don’t (from the Fed or Treasury) or are trying to get others to buy because they are already long (we must assume they are fully long for them to announce their revised forecasts). It could be both.

This API report showed a draw of 0.860 mln bbls in crude, a draw of 0.846 mln bbls in distillate and a build of 2.442 mln bbls in gasoline. Refinery utilization was up 1.8% to 83.5% while crude oil imports fell 548,000 bpd to 7.696 mln bpd. Implied demand was a disappointing 9.177 mln bpd in gasoline and a very healthy 4.534 mln bpd for distillate.

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Bentek Energy

• Northeast Observer – Canaport LNG Sendout Returns to near-Normal Levels.
• Industrial End Users Analytic Report – Industrial Demand Falls Across the Country Today.
• Supply/Demand Balance Analytic Report – Demand Slips Lower But Power Burn Rebound Expected.
• Power Burn Analytic Report – Power Burn Down 1.4 Bcf/d As Temperatures.

Platts

• Asian ship owners urge governments, UN and IMO to act on Somalian piracy. 
• Argentina and Uruguay received interest from 39 companies to build infrastructure for floating LNG terminal.
• China delays high-level oil and natgas talks with Russia following commercial dispute, says source.
• Crude output in northern #Iraq touched post-war high of 739,000 b/d in April due to production boost from the northern Kurdistan province.

Bloomberg

• Oil Falls From One-Week High in New York as U.S. Gasoline Stockpiles Surge.
• Yanukovych Drives Ukraine Toward EU as Russian Natural Gas Agreement Looms.
• EU Nuclear Stress Tests to Include Airplane Crashes With Natural Disasters.
• Yemen’s President Warns of Civil War.

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