The bulls at Barclays, skeptical of non-OPEC

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We're a day removed from a very bullish session on the crude markets -- one of the most bullish sessions in the last five weeks. Data reported by the Energy Information Administration showed US gasoline inventories taking a huge draw, showing a 6.4 million barrel decrease from last week, supported by a 0.4 million barrel decrease in US crude inventories.

Crude futures saw one of its biggest rallies in five weeks following the several-week decline of more than $30/b. But despite the ongoing Russia-Georgia crisis and the BTC pipeline explosion in Turkey, crude markets have remained significantly bearish. Front month crude futures settled today 99 cents lower at $115.01, shrugging off some of yesterday's big gains.

In the recent Barclays Capital Weekly Oil Data Review released on Wednesday, the team led by analyst Paul Horsnell, one of the current market's biggest bulls, looks at this period of falling crude prices and leads us to question what historical time period is this market following most closely. "Is this the cycle that started with the Jakarta OPEC meeting in late-1997 and culminated in the extreme price lows of 1998 and 1999," Barclays notes in its report. "Or is this similar to the drawn-out weakening that started at the beginning of August 2006 with prices about $78 per barrel, and culminated in the temporary fall below $50 per barrel in January 2007?"

According to recent supply-demand 4Q projections by the International Energy Agency and OPEC, the forecast is still relatively optimistic about non-OPEC supply in the fourth quarter. The IEA forecasts 4Q non-OPEC supply at 51.3 million b/d, which would be a jump over its 3Q estimate of 49.6 million b/d.

But this is where Horsnell's team is skeptical. For example, he points out that IEA's original 1Q estimate was 51.3 million b/d, but it came in at 49.8 million b/d. Subsequent quarter projections were consistently reassessed less than the initial forecast.

"This time round there is something of a rear-mirror quality about some of the sentiment," Horsnell's team said in the report. "Q1 came and went, and was so disappointing in supply terms that the IEA now puts non-OPEC supply for the quarter at 49.8 mb/d, 1.5 mb/d lower than originally forecast. The Q2 figure has also been revised down by 1.1 mb/d, and Q3 has been revised down by 1 mb/d."

The Horsnell team's skepticism about non-OPEC supply is one of the reasons why he remains a market bull. Barclays has a less optimistic forecast than the recent IEA projections. It sees 49.3 million b/d supply in non-OPEC supply for 4Q -- a large difference of 2 million b/d from the IEA projection.

As a result of these two differing views of non-OPEC supply, they have very different projections on the market's call on OPEC crude. Barclays' estimate of the fourth quarter call on OPEC crude is 33.6 million b/d compared to IEA's estimate of 31.4 million b/d -- another difference of more than 2 million b/d.

A recent Platts survey of OPEC and oil industry officials showed an increase in OPEC crude oil output of 300,000 b/d to 32.77 million b/d in July. Keep in mind that if the IEA numbers are on track with its projections, OPEC is producing more than its 4Q call. If the numbers are more in line with Barclays, OPEC is producing less than the call.

Because of the Horsnell team's firm view that non-OPEC output will fall short of IEA projections, his team sees a 4Q stock draw of 0.8 mb/d. (The world always draws stocks in the the fourth quarter).

This projected draw would be almost at the 0.9 million b/d level of 4Q last year, according to the IEA. It was the 2007 4Q, and its hefty stock draw, that preceded the first move above $100/b, just after the start of the year.

The IEA does not project OPEC output, so therefore it does not project the size of the stock draw in 4Q. But obviously, with a 2 million b/d difference between its non-OPEC projection and that of Barclays, any IEA estimate on the stock draw would be significantly less.

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