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Our market view - week 34

Released - Last updated

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Fear rather than increased demand is pushing oil prices higher.

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Signs that Israel is losing patience with efforts to curtail Iran’s nuclear program, as well as the intensifying conflict in Syria are renewing the premium in oil prices despite a lack of evidence that fundamentals are improving. Hedge funds are betting on a potential spike in oil prices tied to the possibility of an Israeli attack on Iran.

Brent has risen more than 30% in less than two months from the year's low of $88/bbl, boosted by supply concerns after the dispute with the West over Iran’s nuclear programme.

US oil demand dropped to its lowest in four years in July. At the height of the summer driving season, petroleum demand dropped 2.7% to 18.1 mbd as the weak economy and fuel efficiency gains weigh on consumption.

Oil prices dipped last week on expectations the US would release some of its strategic petroleum reserve to prevent high energy costs from undermining the success of sanctions against Iran. However, Japan, South Korea and the head of the IEA said on Friday there was no reason to release US SPRs.



NATURAL GAS
More volatility emerging due to a variety of infrastructure work and some additional power sector use. However, bearish fundamentals remain in place.

The North Sea maintenance is not affecting gas prices much as demand remains very weak. Also, LNG send-out volumes are up in the UK and Belgium, offsetting the effect of Norwegian cuts.

Industrial production in the euro zone remains weak. The euro zone PMI manufacturing index dropped lower into contraction in July. Even the German PMI showed a sharp decrease.

A heat wave in Europe this week may boost gas use in power generation, supporting prompt prices. Gas is moving into more of a peaking role in power generation. Simple economic realities lead utilities to favour dirtier but cheaper coal as their principal feedstock for baseload power generation. In Germany, coal rather than gas has replaced nuclear generation. So far this year, lignite and hard coal use increased year-on-year by 6.7% and 3.2% respectively, while gas demand remained flat. In the UK, gas use in power generation has fallen to a 14-year low and coal has hit a 6-year high. In Spain, coal accounted for 19% and gas for 14% of electricity generation in the first half of this year while in 2010, gas had a 23% market share, and coal just 8%.

Supply cuts and some demand increases over the next few weeks may lift prices, however only temporary as this period of the year is a seasonal low point for overall gas use. The system still possesses considerable amounts of supply flexibility.



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