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.