Oil focuses on bleak Europe, inventories and outlook

European Vacation

I guess in a weird way it was kind of nice to focus on those good old fashion oil fundamentals for a while. You know things that impact supply and demand more directly. Like refinery explosions, hurricane threats, the Energy Information Administration Short Term Energy Outlook and a surprise drop in crude supply by our friends at the American Petroleum Institute. Of course we knew it could not last forever and it seems our European vacation is over.

Once again the focus for the crude oil market is on Europe and fears that the whole European monetary system is about to fail. The market is getting prepared to be disappointed ahead of key central bank meetings by the ECB and the UK. Mario Draghi has made big promises to the market and knows it is unclear whether they can deliver. The Bank of England cut its GDP forecast and warns that "black clouds of uncertainty are hanging over investment." Not exactly the kind of stuff oil bulls wants to hear.

It is hard to ignore the ridiculously large drop in crude oil supply in a report from the American Petroleum Institute. The API reported a whopping 5.35 million barrel drop and that was before we saw any major storm activity in the Gulf of Mexico. Add to that, last week’s big drop and the possibility of another big drop next week and supplies might start to feel tight. The report also showed that gas inventories rose by 417,000 and distillates up by 2.37 million barrels.

The Energy Information Administration, in their much anticipated Short Term Energy Outlook, increased their demand and price projections. For example the EIA said that the Brent crude oil spot price will average about $103.00 per barrel during the second half of 2012, about $3.50 per barrel higher than in last month's Outlook. The forecast Brent crude oil spot price then falls to an average of $100 per barrel in 2013.

The EIA said that the West Texas Intermediate (WTI) crude oil spot price discount to Brent crude oil narrows from about $14 in the third quarter of 2012 to $9 by late 2013. These price forecasts assume that world oil-consumption-weighted real gross domestic product which increased by 3.0 percent in 2011, grows by 2.8 percent in 2012 and 2.9 percent in 2013.

The EIA also says that the higher crude oil prices will mean that the average regular gasoline retail price forecast for the third quarter of 2012 to $3.49 per gallon from $3.39 per gallon in last month's Outlook. EIA expects regular gasoline retail prices, which averaged $3.53 per gallon in 2011, to average $3.53 per gallon in 2012 and $3.33 per gallon in 2013.

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