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Our market view - week 10

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Oil price dropping on economic concerns


The oil price averaged 116 USD/bbl in February after hitting a high 119.2 USD/bbl early in the month. However, the price has dropped more than 7% in the past three weeks on economic concerns. The general outlook is that economic growth and oil demand is moderate, while supply is good.

Automatic spending cuts were triggered in the US on Friday as lawmakers failed to agree on a resolution to prevent them. According to the IMF, the cuts could cost the US about 0.5% of its economic growth – a factor that would weigh on global oil demand. The parties disagree over how to slash the budget deficit and the $16 trillion national debt, bloated over the years by wars in Iraq and Afghanistan and government stimulus for the ailing economy. The president wants to close the fiscal gap with spending cuts and tax hikes, but Republicans do not want to concede again on taxes.

China’s manufacturing growth cooled in February to a four-month low as domestic demand dipped, an additional challenge for firms already fighting weak sales abroad. The data point to a stabilization of economic activity in coming months, not a strong recovery in growth.

A Reuters survey showed that Middle East output rose in February, in the first monthly increase since October, due to higher exports from Iraq and a slight increase in supply from Saudi Arabia. OPEC supply in February was 30.3 mbd.

Supply flexibility remains the key concern, with little LNG available and imports running close to maximum on high demand days. Day-ahead hit a year-high of 77 p/th last week, driven mainly by system tightness because of low storage stocks.
UK natural gas stocks fell by 28% last week, driven by strong withdrawals due to price incentives, general tightness and poor system flexibility. Storage sites held a total of 1.0 bcm on Wednesday, about 51% less than the same period last year.
Concerns over the lack of storage, combined with supplies close to maximum rates and forecasts of cold weather will continue to support prices over the next couple of weeks.


UK gas storage levels, mcm (Source: Reuters)


NBP DAH average,p/th (Source:Reuters)