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Our market view - week 51

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Political risks will keep risk premium in oil prices



The Brent price has averaged 112 USD/bbl this year, with movements between 89 and 126 USD/bbl. Prices have eased over the past weeks as persistent concerns about the economy and the looming US fiscal cliff have outweighed those about political risks in Israel, Gaza, Syria and Iran. Next year demand is expected to be weak while supply is growing. OECD oil stock levels are growing. The increase in non-OPEC output reduces demand for OPEC crude next year. In its meeting last week OPEC decided to leave production targets unchanged. OPEC output this year has averaged 1.5 mbd above the current target. A potential drop in oil prices is limited by heightened political risks in key producing countries – both OPEC and non-OPEC.

Iran’s oil revenues have been cut in half this year compared with last year. In addition to oil embargoes, Iran also faces financial sanctions that make it difficult to repatriate earnings from oil it does manage to sell. Tighter US sanctions will come into effect in February next year.


Non-OPEC supply is growing strongly, mainly due to US output growth (source: IEA)


Weather outlook shows considerably warmer than normal weather in Europe. Gas demand is still rising seasonally. UK demand is up in December due to a large increase in residential/commercial sector demand while industrial and power sector demand continue to drop. Spanish demand is up by 12% in December, but are still at the level of 2003 demand.
Supply is reacting to higher demand. Pipeline imports to Europe are increasing. Nord Stream flows into Germany are at record 55 mcm/d levels.

There is a downside risk to prices this week with the warmer weather outlook.


UK NBP day-ahead gas price 2012 in pence/therm (Reuters data)