By Robert P. Balan, Senior Market Strategist, Diapason Commodities Management

This is part 2 of Robert Balan’s “Case for higher oil prices by 2012″.  To read part 1 please see here.  

The physical oil market continues to show a remarkable strength even if futures prices are lagging amid worries about the impact of an economic slowdown on crude oil demand. The latest signals of supply and demand tightness come from Asia and the Middle East. One example: the cost of Oman-Dubai crude, the regional benchmark, in the spot market has surged significantly above the price for delivery into early 2012, as reported recently by the Financial Times.

The downward slope of the forward curve, known as backwardation (i.e., “inverted), is an indication of immediate tightness. Another: the premium that Saudi Arabia charges to Asian refiners for its main crude stream has jumped to an all-time high. The dire macro outlook continues to weigh on the oil futures complex, but there remains very little in the way of weakness visible in the physical crude oil market itself. The first-to-second month backwardation in Oman-Dubai crude – an indicator of physical tightness – has spiked recently to $1.40 a barrel, up from just 7 cents a month ago and about 60 cents six months ago.

The backwardation is among the strongest in recent years. The strength of Oman-Dubai is even
more surprising taking into account that the seasonal peak in oil demand in the Middle East – the
air conditioning season over the summer – has just ended.

Read the full research note here:

The Case for higher oil prices Part 2.1_final


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  1. It’s not the case for Brent, but WTIC appears to have had a positive correlation with stocks since 2008:

    And both stocks and WTIC appear to be following expected inflation (TIPS spread):

    As David Glasner wrote in his paper, this is because we are in an abnormal low inflation environment where there is a shortfall of aggregate demand.

  2. There’s enough oil in the ground to cover all of our demands for many decades forward.

    But that’s not the question that matters. What matters is: is it economical to get it out (as well as ecologically acceptable, although I suspect this last point will be glossed over as usual) and can we get it out at a fast enough rate to replenish our receding crude oil productions?

    That question is far from certain, although I’m less pessimistic today than I was even one year ago. It’s likely, however, that much of this decade will be a prolonged slog, not just because of financials but because of the chilling effect very high oil prices have when they’re up there for a longer durations of time.

    Adaption takes time. To change a vehicle fleet takes about 17 years. Much of the world ‘recovery’ hangs on the ability of Iraq and Libya to produce oil until the shale oil production of America starts in earnest, as well as when natural gas will be so cheap so we’ll make it into gasoline en masse for cars all over the world, like Iran just has done.