How High for Oil

OPEC lifted its 2013 oil demand growth forecast to 840,000 barrels per day, up 80,000 barrels a day from its previous estimates. Colder weather, broader global economic recovery and strengthening Chinese consumption were cited as reasons for the increased revisions.

One day later, the Paris-based International Energy Agency reduced its forecast for 2013 global crude oil demand citing “weak macroeconomic conditions… despite signs of improvements in China and the US”.

The 840,000 b/d demand forecast for 2013 put forth by OPEC is 90,000 b/d less than the IEA had forecast in January. The IEA attributed the latest rally in brent oil to cuts in Saudi supply, which came off its 30-year peak of 10m b/d last summer to 9.25m b/d last month. Security concerns in North Africa have also been cited as posing significant threat spare capacity, following the terrorist attack in Algeria’s gas field claiming the lives of 37 workers.

Unlike gold, whose rally has been eroded by improved prospects in the Eurozone and falling tail risks, oil continues to gain from speculative demand thriving on the Federal Reserve’s prolonged QE and the aggressive advance in global risk appetite.

The price differential between US Crude oil and Brent due to the supply glut in the continental US and robust global demand for Brent, suggests further upside in US crude. Brent has risen 10% so far this year, breaking above the March 2012 high to hit the highest since August 2008.

US crude is up 8.7% year-to-date, breaking above both the 55 and 100-WMAs for the first time since September, while simultaneously preserving its six-week trendline support. Having broken its 10-month trendline resistance, US crude faces its next upside target at 100.80, followed by 105.00. Such a steep increase implies a steep trendline support, which renders the rally all the more vulnerable to technical pullbacks. We view the 94.80-95.00 as the required support in order for the three-month uptrend to be maintained.