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Our market view - week 35

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Oil prices were stable last week, underpinned by a host of supply-side concerns while signs of weakness in the global economy weighed on the demand outlook.


Brent is back up to $115 a barrel today on supply worries - lower exports from Iran, a drop in North Sea supply due to oilfield maintenance and the risk of disruption to Gulf of Mexico output as tropical storm Isaac threatens most US offshore oil production.

Most of the news last week concerned threats of increased violence in the Middle East, which has led to a 10% increase in oil prices so far this month and a 30% increase from this year’s low at 89 $/bbl in June. Iran was holding talks on Friday with the UN nuclear watchdog. Iranian oil exports have dropped sharply due to Western sanctions over the country's nuclear programme, and diplomatic sources said on Thursday Iran had installed many more uranium enrichment machines in an underground bunker. Israeli newspapers continue to report that a decision to attack Iran’s nuclear facilities unilaterally prior to the US elections is very close. The fighting in Syria seems to be spreading into Lebanon - another indication that the Syrian uprising could eventually engulf a number of Middle Eastern countries. On Tuesday President Obama threatened to send troops into Syria to keep the country’s stockpiles of chemical weapons from falling into terrorist hands.

The global economy is in bad shape. Europe's economy is contracting, the US is struggling and China, which was seen as a growth engine, is also slowing - all of which points to weak demand for crude. Reports on Thursday showed China's factory sector contracted in August and a rise in new US jobless claims. So far in 2012, US gasoline demand is 4.4% below the same period last year, while gasoline prices are at the highest level ever for late August and continue to climb.

The future of the Eurozone is still much in the balance. Meetings are taking place in Greece and Germany this week to try and settle some of the financial issues plaguing the Greek, Italian and Spanish economies. Athens is in dire need of a larger bailout or it will be forced to leave the Eurozone, which could trigger a series of problems across southern Europe. German Chancellor Merkel’s coalition partners are dead set against more money for Greece, opening up the possibility that the Merkel government will fall or the Eurozone will unravel.

Gas prices are supported by insecurity over Norwegian flows while European gas demand continues to weaken.

Norwegian maintenance remains the dominant supply story in Northwest Europe, with the Segal pipeline to St. Fergus down over the next two weeks, followed by shut-down of 145 mcm/d of supply for 12 days.

LNG continues to flow to Europe as higher European prices and lower Asian spot prices create a situation where the equivalent netback to most Atlantic Basin producers can be achieved in Europe.

The boost in demand from the recent hot spell is fading as temperatures are sliding towards normal. UK demand remains weak, with August demand so far 13% below last year (-27 mcm/d). French demand is below last year for the third month in a row, with August demand down by 7 mcm/d led by lower industrial use. Spanish demand is down by 9% in August with power sector use down by 27%.

The European economy is projected to decline this year. Preliminary August PMI data were slightly optimistic as they improved directionally.