Crude Oil Monthly Update - September 2012: Weakening demand v/s Geopolitical tensions

Crude oil prices would trade within US$90-US$95/bbl in the near term, supported by exogenous factors such as geopolitical concerns.

January 01, 1970 5:30 IST | India Infoline News Service

Energy prices moved sharply lower this month, as rumor mills are churning reports that Saudi Arabia would increase supplies in order to tame high energy prices. In addition, U.S is contemplating at the strategy for a potential release of oil reserves to rein in surging gasoline prices in the world's largest economy. Conversely, there remains a conflict of opinion, with nations like Germany, Italy and France opposing the release of emergency consumer oil stocks. These nations argue that the world oil markets are well supplied despite lower Iranian exports. Crude oil witnessed substantial volatility; with WTI prices registering a high of US$100.4/bbl and a low of US$90.5/bbl. Fed’s decision to expand its balance sheet aggressively failed to provide any support to the energy complex. In this regard, Fed will initiate additional monthly purchases of US$40bn per month in new mortgage debt instruments. These additional purchases would be open ended and would continue until labor markets show any concrete signs of improvement. In addition, the apex body will continue its Operation Twist plan to replace short-term securities on its balance sheet with long-term bonds. The combined actions will together expand the Fed’s intake by roughly US$85bn per month through the end of this year.

However, persistent geopolitical concerns emanating from the Middle East are proving some kind of support to the energy complex. In the latest, U.S has tightened sanctions on Iran's oil company, linking it to the country’s Islamic Revolutionary Guard Corps. The move will allow apply new sanctions on foreign banks dealing with the company. In addition, President Obama has stated to the UN General assembly that the Iranians do not have unlimited time to fully open up their nuclear program to outside inspectors.

On the global fundamental front, oil demand remains weak impacted by uncongenial macroeconomic landscape in U.S, Europe and China. Meanwhile, supply remains comfortable, as both OPEC and non-OPEC production continues to increase. OPEC production rose by about 260,000bpd in August, despite a European Union embargo on Iran's exports. Higher output from other members of the 12-member group aided the growth in output. Production from the three big Gulf producers saw a net increase of around 400,000 bpd in August. World oil demand grew by 0.6% during Jan-Aug 2012 on a yoy basis, while global supply grew at 2.9%. The average global market balance during the eight months of 2012 stood at a surplus of 1.5mbpd, while the same period during the previous year witnessed a deficit of 0.5mbpd. In China, the country's oil imports declined 12.5% in August from a year earlier to the lowest daily rate since October 2010, while implied oil demand in the country dropped to 8.92mbpd.

Crude oil prices would trade within US$90-US$95/bbl in the near term, supported by exogenous factors such as geopolitical concerns. However in the absence of any positive trigger on the demand side, crude oil prices can eventually drift lower towards US$85/bbl in the medium term. Prevalent demand and supply variables do not justify oil prices sustaining near US$100/bbl odd levels.

Crude Oil Snapshot
  Sep-12 Aug-12 mom (%) Sep-11 yoy (%) YTD (%) Avg YTD'12 Avg'11
*Price (US$/barrel)                
WTI Crude 91 95 (4) 79 15 (8) 96 95
Brent Crude 110 113 (2) 103 7 3 112 111
WTI /Brent Spread (19) (18) -- (24) -- -- (16) (16)
OPEC Crude basket 107 111 (3) 102 6 1 110 107
Source: Bloomberg, India Infoline Research 
* Prices as on 26
th September, 2012

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