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Our Market view - week 32

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Continuing turmoil in the Middle East continues to be supportive for crude oil prices


Oil prices rose sharply on Friday, with Brent crude futures hitting a 10-week high, after a US nonfarm payrolls report showed a much larger increase in jobs than expected in July. The dollar slipped 1% against a basket of currencies. A weaker US currency can be supportive to dollar-denominated oil and other commodities.  Brent posted a 2.3% weekly gain and rose more than 7% in July.

Continuing turmoil in the Middle East continues to be supportive for crude oil prices. The EU’s embargo on importing Iranian crude has entered a second month, while fighting continues in Syria.

Brent gained additional support on expectations that North Sea maintenance will cut crude oil production in September. The fifth storm of the Atlantic hurricane season – Tropical storm Ernesto - entered the Caribbean on Friday, supporting crude prices. The Gulf of Mexico is home to 29% of US oil production, 7% of natural gas output and 40% of refining capacity.

An IMF report looking at how the economic policies of the US, China, Euro zone, Japan and the UK affect each other and the rest of the world said the euro area crisis was by far the biggest concern weighing on policymakers' minds. It said not enough has been done to stop the spread of the euro zone crisis. In a worst-case scenario simulation, it found that euro zone output could be cut by five percentage points if policymakers did not act and the euro zone crisis worsened. Also, slower investment in China would hit trade partners and world prices.

Refiners have successfully replaced Iranian crude with other crudes so there is no pressure from the supply side. Saudi Arabia, Russia and Venezuela export around 21% more crude to Asia’s biggest buyers – China, Japan, South Korea and Japan. Iran’s exports to these countries have fallen by a third in the first six months of the year as EU and US sanctions made it difficult to pay for the crude and find insurance cover for tankers. Asia is the region where oil demand is growing.


Sudan and South Sudan have agreed to end a dispute on oil payments and will discuss when to resume southern oil exports through the north. South Sudan shut down oil production in January after failing to agree with Sudan on payment for export through northern pipelines.

We believe tighter supply-demand fundamentals and geopolitical fears will keep oil prices in the $100-$110 range over the next couple of months, despite weak demand



A softer global spot market is putting more pressure on European buyers to lift cargoes. Asian spot prices are falling while tanker rates are still very high. If Spain cannot absorb the LNG it will put Northwest Europe under additional pressure. Underlying demand remains a significant concern, primarily due to weak power sector demand in a period of low seasonal gas use in residential and industrial sectors.

UK gas demand fell by 13 mcm/d in July, with nearly all of the loss coming in power generation. Gas demand will probably not weaken further, but is low enough to keep prices low and limit upside risk ahead of winter.

German gas-fired generation totaled about 24 TWh from January through May, down by more than 4 TWh or 14% year-on-year. Overall fossil fuel generation over the same period increased by over 6TWh due to weather-related increments and significantly higher power exports.

Euro zone economic weakness persists in the current quarter. The latest PMI report on industry and services shows the euro zone contracted in the second quarter. GDP growth has been flat since early 2011.
Short term gas prices will probably remain weak, while increased reliance on LNG imports and renewable energy during peak demand season support winter prices.