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Our market view - week 48

Released - Last updated

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High geopolitical risks limit downside in oil prices despite strong supply growth


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OIL

Geopolitics remain one of the main drivers of oil prices. Brent prices averaged 110 USD/bbl in 2011, a 30 USD/bbl increase from the year before, as the Arab spring caused significant disruptions to oil supplies from Libya and several other producers. This year, the average Brent price is about 2 USD/bbl higher, largely due to the US and EU sanctions on Iran and the civil war in Syria. The price jumped another 4 dollars on the latest Gaza conflict.

Weakening economic and oil demand growth and the strong growth in non-OPEC oil supply are adding more slack to the global supply system. As a result OPEC spare capacity is expected to increase over the next months, but due to the high risk environment prices will most likely remain at an elevated level.

NATURAL GAS

Gas prices increased last week, mainly on concerns surrounding falling temperatures. North Sea maintenance coupled with a colder weather outlook will keep prices up this week. Still, the loss of power sector gas demand limits the effect of the colder weather.

UK in its energy bill said that a firm 2030 decarbonisation target for the power sector will not be included. The announcement may represent good news for the natural gas sector as it could remove potential restrictions on fossil fuel-fired power generation.

The UK Government’s Gas Generation Strategy is expected on 5 December. A decision on whether Cuadrilla Resources will be able to resume operations at its Blackpool shale gas project will also be made shortly. The energy secretary Ed Davey said shale gas offers an opportunity to the UK.


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UK gas price, pence/therm (Reuters data)
Updated