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Oil's bulls running into inflation worries

A bull run that looked set to push oil above $100/b has met resistance

Despite investment-bank forecasts for triple-digit crude, inflation in China and tepid US economic data, especially on the jobs front, have given bears some encouragement. But an outlook for rising Asian demand keeps the market in contango.

Front-month Brent, trading in London on 24 January at $97.60/b, retains a sharp premium to WTI, which has slid beneath $90/b. The differential reflects the market's unease about the US' economic recovery as well as supply outages in the North Sea. Increased supplies to the US of Canadian heavy crude has also softened WTI and pushed stocks higher. For the week ending 14 January, US crude inventories rose by 2.6m barrels, to 335.7m barrels. A correction to end the Brent-WTI differential is overdue, but Brent's fall is more likely than WTI's rise.

Even signs of healthy economic growth give some reason for caution. Stronger GDP figures from the US, expected at the end of January, could end the Federal Reserve's quantitative easing, giving support to the dollar and wiping some value from oil. Fast growth in China prompted two interest-rate rises in Q4 2010 and may yet trigger more government action to dampen inflation – and oil demand.

Those worries are behind Opec's relaxed attitude about prices. It sees no need for an extraordinary meeting ahead of its next planned summit, in June. Iran's oil minister, and Opec's president, Massoud Mirkazemi, joined other group ministers to insist that $100/b oil is neither "concerning, nor irrational". Even at $120/b there would be no need for Opec to loosen its production quotas, he suggested.

With little growth in demand expected from OECD countries – where $100/b oil could trigger a renewed bout of demand destruction – the market's eyes remain on China. Imports in 2010 were 4.79m b/d, or 17.5% more than in 2009. But growth in crude buying may have peaked: imports in December were 4.91m b/d, almost 2% weaker than a year earlier.

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