Oil Market Outlook

Oil Market Outlook

Fears of a new recession dragged down crude prices again last week, triggering another round of risk aversion. The sell-off in commodity and equity markets accelerated on Thursday after the US reported a series of disappointing economic figures and Morgan Stanley revised down its global GDP forecast for this year and next. This capped all of the earlier gains that had been driven by positive M&A news and a bullish US inventory report. West Texas Intermediate (WTI) settled the week at $82.26 a barrel, down $3.12 from a week earlier, while ICE Brent gained $0.59 to close at $108.62.

US economic data fuelled new fears of recession. Housing starts fell 1.5% in July while existing home sales in the same month sank 3.5% to an eight-month low. Manufacturing in New York and Philadelphia continued to contract in August with both indices dropping into negative territory. New claims for jobless benefits rose unexpectedly above 400,000 again.
Similarly, the euro zone economy grew in the second quarter by just 0.2% quarter-on-quarter, down from 0.8% in the first quarter, with Germany and France sluggish. The market was also disappointed with the outcome of the meeting on Tuesday between the French and German leaders to resolve euro debt problems. Both rejected an expansion of the 440-billion rescue fund and the sale of euro zone bonds.
Morgan Stanley on Thursday cut its global GDP growth forecast to 3.9% from 4.2% for 2011, and to 3.8% from 4.5% for 2012. It now sees growth in developed economies averaging only 1.5% this year and next, down from 1.9% and 2.4%, respectively. An aggressive sell-off followed in the oil market, sending WTI down more than $5 and Brent more than $3.
Crude traded positively earlier in the week tracking a rebound on Wall Street after Google announced it would acquire Motorola Mobility Holdings for $12.5 billion, lifting investor confidence in the business sector. US Energy Information Administration data also supported prices. The country's gasoline stockpiles fell by 3.5 million barrels while crude stocks dropped nearly 1 million barrels to a nine-month low.
Thaioil expects prices to remain volatile this week in the range of $80-90 for WTI and $102-112 for Brent. However, we believe the firm supply-demand balance will create a floor above $80 for WTI unless the world backs into recession. The market is now looking for any sign of Fed action to stimulate the US economy such as another round of easing or QE3.
Investors will also watch Libya, where rebels hope to resume oil output at two large fields within three weeks. Storms are also forming in the Atlantic Ocean which could threaten production in the Gulf of Mexico. Key US economic data due this week include new home sales, durable goods orders, jobless claims, consumer sentiment and second-quarter GDP.
Gasoline continued to perform well and prices in Singapore settled near $120 a barrel, steady from a week earlier. Supplies remained tight on strong demand from Indonesia, Vietnam and Malaysia as well as limited exports from North Asian refineries. The diesel market softened slightly amid ample stockpiles and lack of additional demand. Diesel in Singapore fell $2 to end at around $119.
The market focus will this week be on the restart of Taiwan's Formosa refinery, though exports are unlikely to return to normal until September at the earliest.