WTI timespreads strengthening even as WTI prices fall from $80/bbl to $75/bbl, suggesting a tighter physical oil market, with  floating  storage drawing by 40-45 million barrels over June and July to its lowest level in over 18 months.

 WTI timespreads have largely recovered from the liquidation of speculative long positions in May, with 1st-60th month WTI timespreads rising as much as $10/bbl to trade between -$8.00 and -$10/bbl since mid July. Further, WTI timespreads remain resilient, actually strengthening by $0.11/bbl as WTI prices fell from $80.25/bbl to $75.39/bbl this week.

Recent shipbroker reports suggest that floating storage drew by 40-45 million b/d in June and July, to its lowest level in over 18 months. Using the more conservative estimate of the June-July discharge suggests that the draw at sea has more than offset the build on shore, which the IEA estimates at 21 million barrels. Consequently, we believe that total world inventories including floating storage declined counter-seasonally in June and July, even as onshore inventories continued to build, with oil demand exceeding supply by 600 thousand b/d on a seasonally-adjusted basis.

We continue to expect the WTI forward curve to flatten in 2H10, lifting prompt WTI prices into the $85-$95/bbl range that long-dated WTI prices have traded in since October of last year. However, the anticipated tightening of Chinese economic policy is having an impact on Chinese oil demand, with notable weakness in the recent July data. Further, US fiscal policy looks set to shift from a boost to a drag on economic growth, which led our US economists to revise down their 2011 US GDP forecast recently to 1.9% from 2.5%. While we anticipate that Chinese economic policy will loosen in coming months, and the US Fed will likely return to quantitative easing, the downside risk from economic policy in the United States and China to our WTI crude oil price forecast has increased.

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August 16, 2010 Commodities