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Our market view - week 36

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Brent was up more than 9% in August, driven mainly by supply concerns.


Brent was up by more than 9% in August, driven by supply concerns and stimulus hopes from the US Federal Reserve. Oil prices rose last week as Hurricane Isaac triggered the closing of 95% of US Gulf of Mexico oil production and six refineries, but fell back when it was clear that the hurricane would not be as damaging as feared.

A contraction in China’s factory sector activity intensified in August, with output and new orders both lower, pointing to a further slowdown in the economy of the world’s no.2 oil consumer. China’s official PMI fell to a lower-than-expected 49.2 in August.

Releases from the OECD strategic oil reserves to counter high prices continue to be an issue, supported by the US, Britain and France but opposed by Germany and Italy. The G7 finance ministers announced that they recognized the danger to the global economy from high oil prices and called on the IEA to ensure that the world market is well supplied.

Violence in the Middle East continues with the pipeline from Iraq to Ceyhan in Turkey closed again by sabotage. Syrian troops are said to have killed hundreds of prisoners, and Iran may be sending in more advisors and support troops to help the Assad regime. Tensions persist between Israel and Iran, with Israel showing a growing impatience with US and other countries that have been pressing it to give diplomacy and sanctions more time to work and hold off a strike on Iran.

The ECB meeting and US jobs data later this week could give further direction for oil prices. Hopes for further stimulus from the Fed remained intact after Bernanke’s speech on Friday. Quantitative easing is seen as positive for commodities as it drives down the dollar and adds liquidity. The ECB meeting will be monitored more closely as the magnitude of the euro zone’s problems gives it the ability to derail markets across the globe. Chancellor Merkel is trying to preserve Greece’s presence in the euro zone in the face of rising demands that it should leave. Business sentiment in Germany fell for the 4th consecutive month as it appears the country may join much of Europe in an economic downturn.

The weak European economy, additional renewables output, weaker coal markets, low carbon prices and high oil-indexed gas prices are all threats to European gas demand growth. August gas demand was weakening further, while LNG imports were boosted due to lower Asian demand.