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Our Market view - week 22

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Oil prices continued their month-long fall last week on general concerns about the Eurozone economy and weak demand.


New Chinese data show a downturn in real estate and exports, and declining consumer confidence. Combined data from the first half of 2012 indicate a sharp slowdown in the economy, which has grown above 9% for several years. This would have implications for oil imports to China. IEA estimates for 1Q12 demand point towards total product consumption of 9.9 mb/d, an increase of 3.4% from a year earlier – a slowdown from double-digit gains seen at the beginning of 2011.

The growing euro crisis is seen as a threat to world recovery. EU demand for oil is expected to be weaker going forward.
Negotiations with Iran have had a bearish effect on oil markets. Bargaining over Iran’s nuclear program began in Baghdad last week, with Iran and the group of the US, UK, China, Russia, France and Germany presenting very different proposals before breaking to allow governments to consider the case ahead of the next round of talks in Moscow 18 June. The lack of progress could lead to an increased risk premium in oil prices as the result is likely to be even stricter sanctions or military action.


Low demand will continue to pressure UK gas prices
Rapidly warming temperatures and an oversupplied system pressured prompt prices last week. The long dated products were more stable. Yesterday, spot prices were boosted by reduced supplies due to ongoing production problems at the South Morecambe field, and planned maintenance.

A warm outlook for the UK will push prices to move lower, unless producers cut back on supplies. Demand is falling with the increase in temperatures and the loss of power sector demand during the summer. Norwegian flows to the UK have risen in May versus April. Since the start of the summer-12 period, Norwegian gas flows to the UK have fallen less than 30% from the winter, compared with a drop of more than 50% for the corresponding periods in recent years. Also, the recent upturn in LNG supplies to the UK is alleviating fears that Asia is buying LNG at the expense of European storage injection needs.

A 15-day maintenance of the UK Interconnector pipeline will start on 13 June, which will cause a disconnect in prices between the Continent and UK.


NBP Day-ahead price, p/th (Source: Reuters)