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By Chris Shaw

In the view of Citi, the oil market at present continues to be torn between current fundamental strength in the market and macroeconomic-pessimism, as well as between current supply and the potential for stronger production from Libya and elsewhere after the upcoming northern winter.

Given firm oil market fundamentals and some slight improvement in the macro environment in the US and China, West Texas Intermediate (WTI) has broken its downward trending channel. The market has moved into backwardation notes Citi, which means prompt prices are higher than deferred prices. There is potential for Brent crude prices to do the same.

The offset is a still bearish outlook for the global economy given European debt issues, though as Citi notes oil demand is a reasonable indicator of global economic activity and this remains in solid shape at present.

Citi suggests if macro bears sell flat price lower without any sharp reduction in demand, the oil structure will tighten as the market in general remains undersupplied. If prices do move higher it will likely be the result of some event that causes the oil market structure to strengthen.

Given a bearish view on the global economic outlook, Citi continues to watch for more severe demand weakness. A demand collapse as occurred in 2008 remains unlikely in the broker's view, especially as recent Chinese PMI data have dampened some hard landing fears.

For JP Morgan, the WTI oil market has spent the past several weeks trying to juggle falling stocks and future price convergence with Brent crude. At the same time, inventories at Cushing have dropped below the level traditionally associated with a backwardated structure.

JP Morgan points out markets are forward looking, with refiners looking to buy crude for delivery at the end of current maintenance operations. Given the transit time for some crudes to these refineries, buying would be expected around now as refineries prepare for start-up in December.