Oil's Rise Due to Fundamentals - UBS

For the first time in a long time oil prices are not moving because of the U.S. dollar, a broad sell-off of any asset class, or the latest gloomy macro economic problem. Instead, crude futures have risen sharply in 2009 to above $50 per barrel on fundamentals, says Jan Stuart, global oil economist at UBS Securities.

He noted that refiner margins are up, and discounts of heavy crude oil have narrowed along with Brent crude’s contango. “It’s all tentative but suggests that something about the supply/demand dynamic has shifted,” Mr. Stuart said in a note to clients.

Oil demand typically rises between January and February, but the cold weather has added to gas oil demand. At the same time, utilities are burning more fuel oil.

Mr. Stuart said the market should look at Russia and OPEC instead of Gaza. For example, several eastern European utilities have been told to burn oil instead of natural gas because all Russian gas supplies to Europe via Ukrainian territory have stopped.

Meanwhile, OPEC production cuts disproportionately affect the crude oil from which it is easiest to make these heavier oil products, the economist noted. And with trade positioning short, if Brent futures were to breach resistance near $53 and $55 per barrel, he thinks prices could climb substantially higher.

Mr. Stuart said:

We think oil prices below $40 are not sustainable in our base case. Some of the wealthiest sovereign exporters could not meet budgets, and industry would cut activity too much

He noted that long-dated futures prices seem to agree, having held between $60 and $80.

So while he thinks oil prices may take another dip as seasonal demand falls in April, and before the macro situation rights itself, the economist is now more confident in his first quarter Brent forecast of $53.

Oil’s failure to stay above $50 a barrel, however, has some concerned that it may fail to sustain its run.

Tuesday’s reversal was a weak technical signal from a market that appeared to benefit from new geopolitical worries yet still has the backdrop of negative economic news, according to Phil Flynn, a vice president and energy analyst with Alaron Trading Corp. in Chicago.

He told clients:

Those that are still locked in their fair price fallacy have to remember that historically recessions and a weak global economy has never been good for energy prices.

Comments

[Greg Pinelli:]

Oil can go anywhere it damn well pleases...The REAL question is whether anyone with sense will develop..drill....and ship oil at less than $70-75 a barrel????
I don't pull any punches on Alpha....When oil is below $45 I am a consistent buyer of USO.....
As an aside..I wouldn't be too sanguine about the nat gas supply...shale depletes VERY quickly..and if you think pulling a Ukraine..Russia dance is beyond North American suppliers and your comfy living room..I'd seriously rethink that....None of these people love you...

Jan 07 09:01 PM

[John Lounsbury:]

Oil goes up $14 in two weeks and then goes down almost $7 in the past two days. Is this just a 50% retracement? Flip a coin or wait a few more days to get an answer.

Jan 08 12:13 AM

[BrotherMaynard:]

John L pretty much summed it up. That sort of myopic point of view that UBS is pushing is a losers game.

In fact, the move just might be the complete opposite of fundamentals that drove the roundtrip over the past few days as USO and DJ-AIG Commodity trackers rebalanced their portfolios this week: FTAlphaville took a look at this: ftalphaville.ft.com/bl.../

Jan 08 01:33 PM