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Our market view - week 38

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Oil prices are boosted by the US Federal Reserve’s aggressive moves to stimulate the economy and continued Middle East tensions


Brent crude rose each day last week, climbing towards $118/bbl on Friday on hopes for stronger global oil demand after the US Federal Reserve launched an aggressive program to stimulate the economy and bring down unemployment. The Fed said it will spend $40 billion a month to buy mortgaged-back securities for an indefinite period.

Oil prices were also boosted by persisting worries about a potential Israeli attack on Iran, and escalating anti-American protests over a film seen as insulting to Islam. The US sent warships towards Libya where the ambassador was killed, and protesters attacked the US embassies in Yemen, Egypt and Tunisia. Demonstrations have also taken place in Kuwait, Iran, Bangladesh, Morocco and Sudan. The film is used as a means to promote more unrest, which could continue for a while. Warships were assembling in the Arab Gulf yesterday as the US and allies will hold the most widely attended international naval exercise ever in the Middle East. The International Mine Countermeasures exercise involves 12 vessels and officials from 30 countries.

The Saudi oil minister said last week that the world’s largest crude exporter was concerned about high oil prices, would take steps to moderate them, and would meet any additional demand from its customers. Saudi Arabia pumped oil at about 9.8 mbd in July and August, close to the high of 10 mbd hit earlier in the year.

The high oil prices could undermine oil demand and hamper efforts to boost a struggling world economy. The US SPR release is still on the table, but the effect is uncertain. Last year, crude prices fell at the release of 60 million barrels of emergency oil, but regained losses within two weeks and started climbing again.

The decrease in Norwegian exports is well below the stated potential of 145 mcm/d, and gas exports to the UK have actually increased since the Sep 10 maintenance began. Supply concerns during the maintenance period are still supporting spot prices, but Norwegian production will return at the end of this week.

In the UK, wind power generation hit a new record last week. Wind generation contributed an average of 10% of the generation mix, causing gas-fired power to slump to a new low during the afternoon.

European gas demand remains weak. German demand in July was at the same level as last year. Turkish quarterly demand fell for the first time in three years. Year-to-date Spain and France have bought a combined 70 mcm/d below their LNG contract levels, which is one of the reasons Asian spot prices continue to fall despite limited nuclear restarts in Japan. Asian spot LNG demand has also weakened due to stronger contract flows from Qatar.

In a new strategy document, Japan’s government said it intends to phase out nuclear power by the 2030s - a major policy shift. Only two of Japan’s 50 remaining nuclear reactors are currently on line. Before the Fukushima disaster, Japan derived about 30% of its electricity from nuclear power, and its long-term energy strategy had called for the ratio to be increased to 50% by 2030. Under the new policy, the country’s reactors are to be shut once they reach an operating lifetime of 40 years, and no new reactors will be built. This policy shift means Japan will remain a top importer of oil, coal and gas for the foreseeable future