Fairplay: Will Economic Weakness Bring Back an Oil Contango?

“Broker Morgan Stanley (MS) recently announced it was rating the US energy sector as ‘overweight’ based on oil markets that had been moving from strength to strength over the past year. The loss of 1.5M bpd of Libyan crude oil in the face of still-firm demand in 3Q and 4Q11 was an important driver of the positive price outlook expressed on the call. A bigger picture sees ‘spare capacity’ declining further as OPEC inventories are drawn down and the price per barrel rises. Specific shipping implications can be inferred from the MS view that ‘Saudi Arabia [production now estimated at 9.7M bpd] and other Gulf Cooperation Council countries have stated they will lift production’. . . . A never-ending overabundance of vessel supply in loading areas has been overwhelming the increased level of cargo stems. Data from Poten and MS sources shows the number of eastbound spot VLCC fixtures per month has vacillated between 80 and 120, exceeding both year-ago figures and a four-year average. Westbound cargoes have been about 10 to 15/month, above last year and the past few years’ numbers.”