Pragmatic Capitalism

Capital for Living a More Practical Life


By Robert P. Balan, Senior Market Strategist, Diapason Commodities Management

This is part 2 of Robert Balan’s “Case for higher oil prices by 2012”.  To read part 1 please see here.  

The physical oil market continues to show a remarkable strength even if futures prices are lagging amid worries about the impact of an economic slowdown on crude oil demand. The latest signals of supply and demand tightness come from Asia and the Middle East. One example: the cost of Oman-Dubai crude, the regional benchmark, in the spot market has surged significantly above the price for delivery into early 2012, as reported recently by the Financial Times.

The downward slope of the forward curve, known as backwardation (i.e., “inverted), is an indication of immediate tightness. Another: the premium that Saudi Arabia charges to Asian refiners for its main crude stream has jumped to an all-time high. The dire macro outlook continues to weigh on the oil futures complex, but there remains very little in the way of weakness visible in the physical crude oil market itself. The first-to-second month backwardation in Oman-Dubai crude – an indicator of physical tightness – has spiked recently to $1.40 a barrel, up from just 7 cents a month ago and about 60 cents six months ago.

The backwardation is among the strongest in recent years. The strength of Oman-Dubai is even
more surprising taking into account that the seasonal peak in oil demand in the Middle East – the
air conditioning season over the summer – has just ended.

Read the full research note here:

The Case for higher oil prices Part 2.1_final

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