Oil prices stay high as buffer remains uncomfortably low

Oil prices are expected to remain high over the forecast period as the EU/US sanctions and oil embargo targeting Iran’s oil exports and economy will continue to be a bullish factor for oil prices through a tightening of oil fundamentals and elevated geopolitical risk.

Indicators of economic growth and oil demand growth have moved higher, while liquidity-boosting measures from the world’s most powerful central banks increase appetite for risk assets, including oil prices.

Brent oil price forecast for 2012: USD 124/barrel and for 2013 USD 129/barrel

Three risk scenarios:

1. Arab Spring hits Saudi Arabia

Eelevating protests and political turbulence in the oil-rich Eastern provinces of Saudi Arabia are expected to spread to the rest of the Kingdom. The short-term effect of the supply disturbance is projected to push oil prices up by 100% to USD 250/barrel. The severe supply disruptions will call for an IEA SPR release.

2. Political Uprising in Iran

A sharp fall in Iran’s income finally triggers a new wave of opposition against the regime. The potential price spike from the supply disruption and reduced Saudi Arabian spare capacity is estimated at 40%, pushing oil prices up to USD 170/barrel.

3. Chinese Property Bubble Bursts

A dramatic slowdown in the Chinese economy with significant growth ramifications for the Asia/Pacific region as a whole. We assume Chinese GDP growth falls to 3% this year to depression-like levels by Chinese standards, while the Asia/Pacific region experiences growth at 2%. An isolated demand loss of 0.8% of global oil consumption is estimated to result in 30% lower oil prices, bottoming at USD 85/barrel in Q4 2012.

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