Daniel Lacalle

Short Term Commodity Dynamics

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Oil markets have seen several points on the supply side. Nothing major but Russian output edging up to 10mmbpd, while OPEC sailings are expected to remain very low at c22.59 mbpd, leaving them 1.77 mbpd (7.3%) below last year’s level. Oil should continue in its $65-75/bbl range, but I still believe that the break-out from this range will be on the upside as the steady recovery seen outside China lifts distillate demand and as non-OPEC supplies disappoint as the year progresses. These data points will obviously become apparent closer to the 4th quarter, so short term dynamics will likely be driven by inventories, which can continue to build as refinery utilization reaches 83% from current 84.5%.

On gas, two issues are paramount – how much gas the Russians will pipe into Europe just as Europe is supposed to be lined up for rising LNG supplies, and how sharply US domestic gas production will tail off. With Ukraine’s gas transport company taking further steps to shore up its balance sheet and with Russia saying it’ll start to buy Turkmen gas, the signs are that Gazprom is expecting its pipeline deliveries to be substantially boosted from low H1 levels. My analysis remains bearish – new LNG supplies will struggle to be absorbed without pushing prices down, with Q1 2010 prices below $5/mmbtu necessary to clear the market (15-20% down). This week should see the first significant reduction in the official data for monthly US gas production, but nevertheless it is hard to create a bull case in the face of rising LNG supplies destined for the US.

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