GS Energy Weekly: Crude oil prices advance as US inventories decline

AOK - a quick note from GS   Commodities  Published October 5, 2010 WTI prices rally back toward the top of the $70-$85/bbl range that they have traded over the past 12 months as another draw on US total petroleum inventories suggests that the strong growth in emerging market demand is beginning to tighten the US supply-demand balance. US total petroleum inventories drew by 5.1 million barrels… US total petroleum inventories drew by 5.1 million barrels last week, triggering a rally in WTI crude oil prices that has lifted them $5.70/bbl and to the top of the $70-$85/bbl range that they have been trading for much of the year. While last week’s draw on US total petroleum inventories was modest in relation to the overall level of US inventories, which remain near 25 year highs, the draw clearly acted as a catalyst to send prices higher as oil market sentiment swung in a more constructive direction. ...primarily driven by lower imports and strong exports With the United States exporting an increasing amount of petroleum products, US net oil imports of both crude and products have fallen below last year’s depressed levels, and fell last week by another 220 thousand b/d. While US implied oil demand remains firm, we believe that the decline in US net oil imports is the main driver of the draw on US total petroleum inventories. China’s economy re-accelerating, offsetting the slower pace of the US economic recovery Contributing to the rally in WTI crude oil prices were further indications that the pace of economic growth in China and the emerging market countries is accelerating even as the pace of the US economic recovery continues to slow. More specifically, the official Chinese Purchasing Managers Index (PMI) released on Friday reported strong growth in September. In contrast, the latest reading of the US ISM survey and the construction spending data published last Friday signal a further slowing of the US economy. However, we expect export demand for US petroleum products to remain high while crude imports decline further, which should help to sustain the draw on US inventories. We expect a continued draw on US inventories to more normal levels to push WTI crude oil prices into an $85-95/bbl trading range by the end of the year.