Risk Premium Will Not Reach 'Arab Spring' Highs

BMI View: We increased ou r 2013 average price for WTI and Brent following the risk -on sentiment that has gripped the markets. Though we do not see oil prices reaching the same le vels as during the Arab Spring due to the contained nature of the escalation , we do recognise the risk premium tha t is underlying the oil prices. Tapering will be the counter-force to watch out for over September that will be able to take prices back down. We are also pricing in another sharp rise in WTI towards the end of the year when the 700,000 b/d Houston Lateral pipeline is due to come onstream.

The rally in prices over the past week has prompted us to raise our 2013 average Brent price to US$111/bbl and WTI to US$102/bbl; from US$106/bbl and US$99/bbl respectively. Supply disruptions in key producers like Iraq, Libya and Nigeria have stoked market worries about supplies, which are now exacerbated by tensions in Syria.

Political risk premium has dominated oil trading, sending the main contracts (WTI and Brent) into the highest levels since February 2013 for Brent, and for the entire 2013 for WTI. As we head into the fourth quarter of the year there will be four main events that will be able to move the oil markets, with this escalation in the Syrian civil war the most pertinent force behind rising prices. We also note key events such as the September 22 nd German federal elections, the pending decision by the US Federal Reserve on tapering monetary easing, and progress with Japan's implementation of the 'third' arrow. Of the above, the biggest counter-weight to the Syrian political risk premium is going to be the Fed tapering, which we have noted to be negative for oil prices.

Supply Disruptions Persist
Oil - Global Supply/Demand Balance, 000s b/d

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

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