Oil Market Outlook

Oil Market Outlook

Uncertainty about a US economic slowdown outweighed bullish US oil inventory data last week. West Texas Intermediate (WTI) prices have shown a steady downward trend since the end of the previous week due to the jump in the US Consumer Price Index by 0.8% in November, the sharpest climb in more than two years. The rising inflation rate would discourage the Fed from trimming interest rates in the foreseeable future, causing the largest one-day increase of 1.08% in the US dollar against the euro in three years and hence softening oil prices.

Nevertheless, the market received some support from a substantial drop in US crude stocks by 7.6 million barrels as bad weather delayed crude imports.

Despite a jump in GDP growth from 3.8% (annualised) in Q2 to 4.9% in Q3, the outlook for the US economy remains doubtful. The significant increase was mainly driven by a lower trade deficit because of a weak US dollar and lower spending on imports, not strong domestic consumption. Economic growth, the credit crisis, the Fed's responses and the dollar's value continue to play a crucial role in the energy market.

Asian gasoline prices have been falling since last Monday and closed at around $98 a barrel, as several refineries in China are coming back online to supply more volume, after Beijing reduced exports significantly in December to around one million barrels to meet local demand. Vietnam also reduced its December imports by 60% from November, to around 500,000 barrels. However, additional demand from the Middle East should help absorb the surplus cargoes from India.

Despite relatively steady demand from the region, we foresee the market to be soft with limited trading activity, as traders would have prepared for the upcoming holidays and finished most purchases already.

Diesel prices were relatively strong in all regions in the past week, with Asian prices trading above $106 a barrel. Falling production in the US and strong demand from South America pushed up the prices of low-sulphur diesel in the US.

In Europe, lengthy refinery maintenance in Q4 amid cold weather also pushed up the prices of heating oil.

The supply shortage in China continues to provide firm support to Asian diesel prices, as two of the country's big state-owned oil companies plan to import at least four million barrels of diesel for January.

Furthermore, the Chinese government has suspended the 17% VAT on imported diesel from December to March to cover domestic shortages and rebuild stocks. We expect that strong Chinese demand will continue to provide support to Asian diesel prices as a result.