Energy prices have witnessed impressive upside during July, underpinned by Iran tensions and aggravating civil war in Syria. Iran had threatened to block crude tankers via the Strait of Hormuz. In this regard, the country's National Security and Foreign Policy Committee have drafted a bill calling for Iran to try to stop oil tankers from shipping crude through the strategic route. Recently, U.S escalated pressure on Iran's capability to export oil, sanctioning the National Iranian Tanker Co. and four alleged front companies for oil trade. The U.S. Treasury Department would freeze American assets belonging to the tanker operator, known as NITC, and block the company’s transactions from the U.S. financial system. The Treasury stated Iran’s government controls the company, a former subsidiary of the state-owned National Iranian Oil Co. that was officially privatized 12 years ago. In addition, tensions escalated between Iran and Israel, as the Islamic Republic launched test missiles, which are capable of hitting targets as far away as Israel. Aggravating woes further, Israel accused Iran of plotting a bus explosion in Bulgaria that killed three Israelis among others and vowed retaliation. However, concerns have eased to an extent after Israel clarified it would not rush into open conflict with Iran. Oil prices were also supported by an oil strike in Norway that lasted for literally two weeks. The strike has resulted in to production loss of 230,000 to 250,000bpd.
Market participants have been panic-stricken by Iranian threats to close the Strait of Hormuz; however we infer that this is more likely an incompetent sabre-rattling than anything else. Iran cannot afford to block the Strait of Hormuz, as the country’s economy as a result could be adversely impacted and further they have to face the retaliation from U.S and other Western nations. EU sanctions imposed on Iran oil imports could notionally remove up to 1.5mbpd of oil from the global markets. However, such losses are being offset by the incremental growth in Saudi output, who is exporting close to 10 mbpd. Moreover, Libya and Iraq are also ramping up production and similarly there has been steady rise in non-OPEC supply. Western sanctions on Iran would make it difficult for the Islamic Republic to export oil, however the country is reported offering sufficient discount on the oil prices, which can attract lot of nations in terms of stockpiling for their energy needs.
Brent continues to sustain considerable premium to WTI on the back of Iranian supply concerns, violence in Syria and looming threat of a dispute between Iran and Israel. However, Brent oil markets are decently supplied, as there has been optimum growth in Saudi Arabian, Libyan and Iraqi output.
On the global fundamental front, oil demand remains weak impacted by deteriorating macroeconomic backdrop in U.S, Europe and China. Conversely, supply remains comfortable, as both OPEC and non-OPEC production continues to increase, while on the inventory side, inventories in the US are now around a three-year high. World oil demand grew by 0.7% during June 2012 on a yoy basis, while global supply grew at 3.8%. The average global market balance during the first six months of 2012 stood at a surplus of 2.2mbpd, while the same period during the previous year witnessed a deficit of 0.5mbpd.
Considering prevalent supply and demand variables, we are not comfortable with high energy prices and infer that prices will move lower again in the range of US$85-80/bbl as we head into August.
Crude Oil Snapshot
|Jul-12||Jun-12||mom (%)||Jul-11||yoy (%)||YTD (%)||Avg YTD'12||Avg'11|
|WTI /Brent Spread||(15)||(13)||--||(21)||--||--||(15)||(16)|
|OPEC Crude basket||104||93||12||112||(8)||(3)||111||107|
* Prices as on 23rd July, 2012
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