Oil Market Outlook

Oil Market Outlook

West Texas Intermediate prices were volatile last week, rebounding more than 7% to $121.18 a barrel on Thursday due to growing concerns over geopolitical issues between the US and Russia. But crude prices collapsed more than $6 on Friday to settle at $114.59 as the US dollar strengthened and the BTC pipeline, which moves oil from the Caspian Sea through Turkey, resumed normal flows on Friday after a fire closed it earlier this month. The tension in Georgia regarding the breakaway South Ossetia was further exacerbated amid no signs of large-scale or rapid pull-back of Russian troops. Last week, Russia responded aggressively to a deal between Poland and the US to set up a missile shield system in Poland. The continued conflicts between Russia and the US will be a supportive factor for crude prices again this week.

The second key factor for a potential upside is whether Opec will decide whether to trim its oil output by around 250,000 to 450,000 barrels per day at its meeting on Sept 9 in Vienna in order to reflect the recent slowdown in global oil demand. Thirdly, the 2008 Atlantic hurricane season should be busiest during the period to early September. Storms could disrupt tanker operations or cause serious damage to oil rigs in the Gulf of Mexico, which normally produce 1.5 million barrels per day of crude.

Apart from oil supply and demand, the US dollar has an additional role to play in commodity investment. The strengthened dollar will ease demand for commodities as a hedge against inflation. This factor could be a downside risk for crude prices.

After showing a slight improvement in the past two weeks, the gasoline market last week headed south again. A slowdown in regional demand is expected to be a main factor weighing down gasoline prices over the short term. China is likely to turn back into a net gasoline exporter in September as it plans to reduce imports at a time of high domestic stocks. Vietnam also is delaying its gasoline imports next month due to relatively high stocks and seasonal low demand. Moreover, arbitrage opportunity to move gasoline to the US West Coast has been reduced as the summer driving season nears the end, leaving a surplus supply in the region.

Oversupply and declining demand for diesel are anticipated to put downward pressure on prices in Singapore again in the coming weeks. After completing its stockpiling for the Olympics, China is likely to skip diesel imports in September for the first time in several months. Indonesia is also reducing its diesel import tender in September by half due to heavy stocks. Together with a slowdown in demand, supply in the region is growing.

Sellers are still struggling to move excess barrels outside the region where demand is starting to fall. This will cause middle-distillate stocks in Singapore to build again this week to above a five-year high. The outlook for the diesel market should remain weak until supply starts to decline following refinery run cuts in Asia.

Prepared by Thai Oil Plc