Prices Softening But Geopolitical Risks Remain

BMI View: We maintain our above consensus 2014 average price forecasts for Brent and WTI at USD109.8/bbl and USD102.0/bbl respectively. We note risks to the downside due to a reasonably well supplied global market, but we refrain from downgrading our forecasts as a number of geopolitical events are still in flux and therefore pose significant upside risks to pricing over the remainder of 2014.

Brent - Weakening But With High Risks

We maintain our 2014 Brent forecast at USD109.8/bbl for the time being, given the potential impact of geopolitical developments that remain unresolved. That said, we note downside risk driven by improving supply and reduced demand in the Atlantic market for light sweet blends. We therefore reiterate and maintain our view that prices will soften in the medium-term.

Volatility Returning To Brent
Front-Month Brent Crude - Daily (USD/bbl)

BMI View: We maintain our above consensus 2014 average price forecasts for Brent and WTI at USD109.8/bbl and USD102.0/bbl respectively. We note risks to the downside due to a reasonably well supplied global market, but we refrain from downgrading our forecasts as a number of geopolitical events are still in flux and therefore pose significant upside risks to pricing over the remainder of 2014.

BMI and Bloomberg Consensus Forecasts* For WTI and Brent, USD/bbl
  2014f 2015f 2016f 2017f
WTI - Bloomberg Consensus 101.3 99.0 94.7 94.0
WTI - BMI Forecast 102.0 99.0 96.0 94.0
         
Brent - Bloomberg Consensus 108.8 104.7 103.0 100.0
Brent- BMI Forecast 109.8 108.0 103.0 101.0
* BMI is a contributor to Bloomberg Consensus. f=forecast. Source: Bloomberg, BMI

Brent - Weakening But With High Risks

We maintain our 2014 Brent forecast at USD109.8/bbl for the time being, given the potential impact of geopolitical developments that remain unresolved. That said, we note downside risk driven by improving supply and reduced demand in the Atlantic market for light sweet blends. We therefore reiterate and maintain our view that prices will soften in the medium-term.

We still see considerable risks from escalation of unresolved geopolitical events in Russia, Iraq and Libya that could cause price spikes.

  • Russia - High risk but disruption to supply unlikely. Tensions between Russia and Ukraine are expected to extend over a multi-month period and could drive commodity price hikes if the conflict escalates ( see 'Emerging Scenarios: Multi-Month Conflict Ahead', August 6).

  • Iraq - Oil production to cautiously continue. While the sudden advance of IS has been curbed, recent moves on Kurdish held positions have highlighted that IS remains a considerable threat to oil operations. We still do not rule out attempts by IS to disrupt Baghdad's revenue flows. Further, disruption at Iraq's only export terminal, Basra, be it by insurgency, bad weather or unforeseen maintenance, would drive a significant spike in the Brent price.

  • Libya - No return of exports. Instability in Libya has not subsided ( see 'On The Brink Of Civil War', August 5). The lifting of force majeure on Libya ports in July saw a substantial drop in the risk premium, which has not returned despite the lack of physical exports from the country.

However, while geopolitical risks remain, an increasingly well supplied Atlantic oil market, particularly with regard to light sweet crude blends, is putting fundamental downward pressure on Brent ( see 'West African Crude Losing Markets', July 9). 

The considerable increase in light shale oil production in the US and weak demand from the European refining sector has considerably cut demand in the Atlantic market for light-sweet crude. The futures market has moved into contango, reflecting the (somewhat unexpected) strong supply and wind down in demand in the oil market over July. This is driving a shift in Brent's trading dynamics, leading to discounts in the Brent benchmark and global crudes linked to its pricing like Nigeria's Bonny Light blend. 

We are therefore seeing a return to volatility in the Brent price as a well supplied global oil market and concern over geopolitical risks clash. This has seen the Brent price break both a long-term resistance line at USD111/bbl (due to Iraq), then support at USD106/bbl (good supply) in a matter of weeks.

Volatility Returning To Brent
Front-Month Brent Crude - Daily (USD/bbl)

We continue to see Brent trading within a range of USD104-114/bbl over the coming months, noting strong support in the USD100-105/bbl range.

Main Risks To Brent Price Forecast For 2014/2015
Upside Risk  Downside Risk 
Russia: Re-escalation of military tensions between Ukraine and Russia threatening energy flows Libya: Commencement of export shipments from ports (+540,000b/d).
Iraq: Increased sectarian violence and/or an advance of IS into the South, leading to supply disruptions (-2.5mn b/d) Global: Weakening oil demand from soft refined fuels demand and low refining margins; especially in Asia and Europe.
Libya: Increased inter-tribal violence preventing oil flows from reaching export markets Nigeria: Production normalisation (+200,000b/d)
  Iraq: Export Agreement Between Baghdad & Erbil (+300,000b/d)
  Iran: Lifting of oil export sanctions by international community (+1mn b/d)
 Source: BMI

WTI - Rising Exports To Curb Fall

We see continued efforts to circumvent the US oil export ban putting upward pressure on WTI over the remainder of the year, though strong levels of production and fuel supply will limit gains. We maintain our 2014 average price forecast for WTI at USD102/bbl.

Record refinery runs in July have added to the uptrend in petroleum product stocks supplementing supply, while demand from the driving season has remained relatively steady. This has driven downward pressure on WTI, further exacerbated by the weakness in Brent, which saw the US benchmark maintain its USD6-8/bbl discount. A so far uneventful hurricane season in the Gulf of Mexico has also limited gains in WTI, though remains a risk over coming months.

However, in June, US exports of crude oil - mainly to Canada - reached their highest level since 1957 at 389,000 barrels per day, according to the EIA. This was more than OPEC producer Ecuador. We expect further efforts to circumvent the crude oil export ban to increase exports will put upward pressure on WTI. The first cargo of 'stabilised' condensate was shipped from Texas in late July ( see 'Small Steps Toward Greater Condensate Exports', June 26 2014). We also expect the rise in US refining capacity to help support prices ( see 'Refining Capacity Set To Expand', July 3).

Remaining Supported Despite Bearish Move
Front-Month WTI - Daily (USD/bbl)

Read the full article

This article is tagged to:
Sector: Oil & Gas, Commodities
Geography: Global
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.