HardAssetsInvestor

August 22, 2012

WTI Will Surge To $105 As US Inventories Plunge Again

Details

Oil prices may continue to rally amid plunging U.S. inventories.

The Department of Energy reported this morning that in the week ending Aug. 17, U.S. crude oil inventories decreased by 5.4 million barrels, gasoline inventories decreased by 1 million barrels, distillate inventories increased by 1 million barrels and total petroleum inventories decreased by 3 million barrels.

Crude oil prices were slightly higher after the latest inventory figures. U.S. inventories continue to draw down rapidly, indicating a tightening market. Excluding the Midwest, oil inventories in the U.S. are now below the year-ago level for the first time since March.

Investor sentiment remains positive, as clearly evidenced by stock markets, which are near four-year highs in the U.S.

For oil, the demand side continues to be weighed down by relatively tepid growth in major-consuming regions such as China, the U.S and Europe. However, the promise of central bank stimulus, should economic conditions deteriorate, provides a floor for demand growth.

Meanwhile, the supply side is much more bullish. Geopolitical concerns are, of course, ever-present in the oil market. But now especially, tensions between Iran and the international community are at consistently elevated levels and the civil war continues to rage in Syria.

Moreover, despite strong increases in U.S. output, overall production growth outside of OPEC has been anemic. In turn, the cartel has had to raise its production to compensate, sending its spare capacity to the lowest levels since 2008.

Until there is more slack in the oil market on the supply side—particularly, a notable increase in OPEC’s spare capacity— the bias in crude markets remains higher. With the demand outlook currently depressed, any upside in economic expectations would send prices even higher.

Our objective for Brent is $120, but we still anticipate that WTI will outperform as the spread between the two benchmarks narrows. We see WTI topping $105 in the coming months.

BRENT

WTI