Opinion: ESAI sees potential oil bull trap

Oct 22 – ESAI estimates the global contraction in oil demand will average around 1.75 million b/d in 2009 and then oil demand will grow by at least 1.3 million b/d in 2010. OPEC production has begun creeping up, although quota discipline remains impressive in the face of almost $80 crude oil prices.

The combination of creeping OPEC output and still weak demand will result in a counter seasonal surplus in the fourth quarter and very high distillate stocks, indicating a fundamentally soft market this winter. But, this fundamental picture is overwhelmed by other signals coming from the investment community.

Gold has become a popular investment for the financial sector, driven by rising inflation fears about the dollar. This flight to quality has contributed to further weakness for the dollar, and consequently stronger commodity prices. In the meantime, while absolute levels of distillate inventories are currently high, future stories of product draws for heating oil will be painted as bullish factors for the market over the winter months.

So, the weak fundamentals are masked by other factors in the financial markets. This could result in a bull trap in which oil prices continue rising until the consensus believes that they are too high for the fundamentals.

Reuters