As Iraqi militants advanced on Baghdad with M-16s and stolen tanks in June, most investors and traders in the jittery oil markets believed oil prices would spike even higher.
But as oil prices crested at $115 in mid-June, there were clear indications of the drop that has ensued and shocked markets in the past weeks, according to Francisco Blanch, a Bank of America analyst who predicted that oil prices would moderate in the fourth quarter.
Blanch told Reuters in an interview that graphs of the forward price curve and signals from leaders of Saudi Arabia that they were comfortable with lower prices pointed to increasing supplies and a decline in prices.
Still, even Blanch, who has been one of the most bearish analysts in the industry this year has been surprised by the size of the recent rout that has wiped more than 20 percent off the oil price since the start of September.
Now, Blanche expects Brent to stabilize in the next few weeks, but sees the potential for deeper declines in WTI.
Brent forward spreads - the difference between the nearby and future prices - paint a picture of growing stability, Blanch said.
"Front to second and front to third-month differentials in ICE Brent are narrower than they were 2 to 3 weeks ago," he said. "I think we can go a little bit lower for Brent."
FIRST CONTANGO IN FOUR YEARS
His downbeat assessment was particularly stark in an increasingly bullish market on June 16 when Secretary of State John Kerry warned of air strikes in Iraq.
That news sent prices to $113 a barrel.
But Blanch reaffirmed his more moderate views with Brent at $104 and WTI at $90. A risk even remained that WTI oil could slip to $50 within two years, his team said in a research note.
Brent and WTI were firmly in backwardation, with cash prices sharply higher than forward prices, but pockets of narrowing time spreads along the forward signaling increased supply.
"We started to see a weakening in time spreads," he added.
At the time, analysts generally expected fourth-quarter Brent prices of about $110 a barrel, and WTI prices of about $100.
A month later, Brent's inversion had disappeared, returning the market to contango for the first time in four years, a market structure that allows traders to sell stored crude for a profit at a later date.
That effectively gave the Saudis the chance to build inventories as supply outpaced demand, Blanch said.
Beyond the time spreads, the response from the Saudis to weak prices has been measured.
"The Saudis seem to be perfectly complacent with the dropping oil price," he said.
For now, he expects a relatively healthy global economy will limit the losses, although a range of potential issues could derail that stability, said Blanch.
The Ebola virus, a disease that has already resulted in stepped-up airport security could curtail flights, and cut demand for jet fuel.
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