- Oil market continues to tighten
- Global inventories down and supply issues remain
- Tight market should support prices
- Barclays forecasting average of US$115 per barrel in 2012

By Chris Shaw

A main theme for Barclays Capital in recent months has been a widening divergence between macro-based and physical based views of commodities in general and oil in particular. The gap between the two has continued to grow, with those taking a macro view surprised oil prices have not fallen further and those looking more at market fundamentals surprised the price has not risen.

According to Barclays, the oil market has continued to tighten at an increasing rate, while perceived macro policy related risks also appear to have grown. This suggests barring a major policy catastrophe and further negative price momentum any downside below US$100 per barrel (Brent) appears fairly limited.

On the flip side of the equation, Barclays suggests without a decisive lift in macroeconomic fears, upside above prices of US$120 per barrel also appears limited at present.

Without the current economic uncertainty, Barclays takes the view Brent prices would likely have traded at all-time highs and moved past the US$150 per barrel level sometime this year. This reflects far tighter market fundamentals than was the case in 2008 and lower than average OECD inventories.

On the numbers of Barclays, US inventories of both crude oil and oil products have fallen below their five-year averages. The surplus in the US has gone, with inventories falling almost one million barrels per day over the past month relative to normal seasonal patterns.

The latest week has shown a decline of 1.8 million barrels per day relative to the five-year average. This has come at a time when oil market conditions are much stronger than was the case in the latter part of 2008, while the external environment is not quite as dangerous as it was three years ago.

OECD inventories are also down and are now more than 35 million barrels below seasonal averages, a level of tightness the group suggests has not been seen for years. Stocks in OECD Asia-Pacific are estimated to be around 23 million barrels below seasonal averages, this lack of supply supporting the view downside risk to the oil price appears more limited than in the previous cycle.

At the same time momentum in underlying macroeconomic data has actually picked up in the past few weeks, enough for Barclays to lift its forecast for US GDP growth for the September quarter to 2.5%.