Brent Heading Lower, But Big Support At USD100/bbl

Front-month Brent crude has broken below multi-year uptrend support at USD106/bbl and this bolsters our bearish multi-month outlook. Brent prices have been dragged by positive supply news emanating from Iraq and Libya, two OPEC members that have been producing significantly below their potential. While these developments could prove positive for Brent supply in the coming months, there are significant risks that we highlight below. On the whole, we retain a bearish medium-term outlook on Brent prices but expect significant support around USD100/bbl. We continue to forecast an average Brent price of USD105/bbl in 2014 and USD102/bbl in 2015.

Positive Supply News, But Risks Remain

A break by front-month Brent crude below support at USD106/bbl and an erosion of the backwardation at the front end of the futures curve illustrates expectations that near term market supply will improve. Brent prices have been dragged lower by positive supply developments:

USD100/bbl In Sight
Front-Month Brent Crude, USD/bbl (Weekly Chart)

Front-month Brent crude has broken below multi-year uptrend support at USD106/bbl and this bolsters our bearish multi-month outlook. Brent prices have been dragged by positive supply news emanating from Iraq and Libya, two OPEC members that have been producing significantly below their potential. While these developments could prove positive for Brent supply in the coming months, there are significant risks that we highlight below. On the whole, we retain a bearish medium-term outlook on Brent prices but expect significant support around USD100/bbl. We continue to forecast an average Brent price of USD105/bbl in 2014 and USD102/bbl in 2015.

USD100/bbl In Sight
Front-Month Brent Crude, USD/bbl (Weekly Chart)

Positive Supply News, But Risks Remain

A break by front-month Brent crude below support at USD106/bbl and an erosion of the backwardation at the front end of the futures curve illustrates expectations that near term market supply will improve. Brent prices have been dragged lower by positive supply developments:

Iraq: Russian Lukoil has announced the initiation of production at the massive West Qurna-2 oil field in Southern Iraq. Production started at 120,000b/d and the company expects to increase this to 400,000b/d by the end of 2014. The field is expected to peak at a rate of 1.2mn b/d. This 14bn barrel field will play a major role in ramping up production from the country over the coming years.

Libya: Reports over the past two days have created hope for an end to an eight-month standoff between the country's government and rebels, which could result in the reopening of key oil ports in the coming weeks. A government spokesperson said an agreement with rebels could be finalised in two or three days that could eventually release about 600,000b/d of crude.

Gradual Return To Market
Net Oil Exports (Crude & Products), 000b/d

While these developments could prove positive for Brent supply in the coming months, there are significant risks, which we highlight below:

In Iraq, we see the struggle to increase oil production continuing though 2014 as spill-over from the Syrian conflict undermines security in the country and discourages investment. Furthermore the ongoing stalemate between Baghdad and Erbil is keeping potential oil from the market. These issues, combined with the upcoming parliamentary election are significantly impacting the government's administrative efficiency, slowing the much needed high-value contract approvals required to boost oil output.

In Libya, we are very sceptical as to whether key oil ports will be sustainably reopened in the coming weeks. Given the structural nature of the rebels' demands and deep divisions in the ruling General National Congress, we believe progress on negotiations will be slow ( see 'Production Headed For Collapse', 31 March). Even if ports are reopened, this will have a limited immediate term affect on global supply. Libya's production has been dramatically reduced and we expect it to remain so for the foreseeable future. For instance, current output stands at only 150,000b/d, down from 1.4mn b/d in July. Moreover, demand for Libyan oil would be limited in the short term due to reliability concerns and high shipping and insurance costs.

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Related sectors of this article: Commodities, Oil, Energy - Commodities
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