JPMorgan Expects Oil to Rally, Sees Any Price `Setback' as a Signal to Buy

Any oil price fall should be seen as an opportunity to buy the contract as the next move in the market is likely to be a rally, JPMorgan Chase & Co. said.

“The signal that the next leg higher is imminent will be tighter Dubai forward spreads and a narrower Brent-Dubai spread,” Lawrence Eagles, head of commodity strategy in New York, said today in a monthly oil market report.

JPMorgan said it expects the dollar to weaken by four to five percent over the next six months, giving oil a boost. A declining dollar increases the appeal of energy as an inflation hedge. The strength in crude is also bolstered by rising demand in several regions, the bank said. A narrowing spread, when Dubai oil rises closer to North Sea Brent, typically shows increasing Asian demand.

The Brent-Dubai exchange for swaps, or EFS, for December narrowed 12 cents to $2.40 a barrel today, according to data from PVM Oil Associates. The EFS is the price difference between Brent futures and Dubai swaps contracts and signifies Brent’s premium relative to the Middle East grade. The December-January Dubai spread shrank to minus 36 cents from minus 80 cents on Sept. 27, according to data compiled by Bloomberg.

“The key risk is that we are being too cautious and that the threat of $100 a barrel oil that is implicit in our fourth- quarter 2011 oil forecast arrives much sooner than we expect, driven by not only a weak dollar, but also by rampant Chinese and emerging market demand, the rebuilding of French strategic stocks, and an upward bias to food prices,” Eagles said in the report.

‘Should Be Bought’

“We continue to believe that any setback in the crude price should be bought,” he said.

West Texas Intermediate oil for December gained as much as 81 cents, or 1 percent, to $81.37 a barrel in electronic trading on the New York Mercantile Exchange, and was at $80.91 at 9:43 a.m. London time. Yesterday it declined $1.98 to $80.56 a barrel. The contract is down 1 percent this week.

JPMorgan said it sees a growing supply deficit in oil products in the fourth quarter. The resulting increase in refinery runs will lead to a draw in global crude inventories through February, it said.

“The recent fall in crude stocks in Cushing should soon be reversed, widening the WTI contango and sending WTI back to a heavy discount to dated Brent,” Eagles said in the report.

The nationwide strike in France, which has halted refineries and led to fuel shortages, will lead to a six percent drop in demand in October unless it “drags far beyond the end of this week,” Eagles said.

To contact the reporter on this story: Raj Rajendran in Singapore at rrajendran4@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net

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