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Petrol prices will remain high so don’t step on the accelerator this Easter

Oil energy commoditiesDrive slowly – don’t rush if you are going to your holiday home this Easter – petrol prices are expected to remain high. Crude is the main driver of petrol and diesel prices. Supply concerns are driving crude oil prices higher and the forward supply balance looks tight. Petrol prices show more strength than would have been the case looking at the weak structural demand as refinery closures on both side of the Atlantic Ocean have tightened the market. Petrol will be strong for the next few months as the US east coast will require additional petrol imports from Europe to make up for the refinery close-downs in the US.

Skittish oil prices with spare capacity at razor-thin levels

Last week the White House cleared the way for tougher sanctions on Iran underlining that a cut-off of Iranian oil would not significantly harm the world markets. The move allows the US to go forward with new sanctions targeting financial institutions trading with Iran’s central bank, the clearing house for Iranian oil sales. Big buyers of Iranian oil from Japan to South Africa have announced significant cuts of Iranian purchases, and now South Korea and Turkey have indicated they will comply with the US sanctions. Turkish officials said the country will cut Iranian imports by 10-20% and replace these with Libyan oil.

Iran is the third-largest oil exporter in the world. We expect the sanctions will have a significant impact on the physical supply/demand balance as an increasing share of Iranian oil will be removed from the global oil market. As Saudi Arabia and a few other countries such as Kuwait and the UAE will increase production to fill the gap left by the Iranian cutbacks, OPEC spare capacity is expected to fall to razor-thin levels. This will leave the oil market highly exposed to further unexpected oil production disruptions.

No wonder that oil prices are skittish these days as a string of recent supply-side disturbances have already started to drain the world’s safety buffer. The Iraqi semi-autonomous Kurdish region stopped oil exports yesterday in a dispute with Bagdad over the payment to oil producers. Disagreements over the split of the oil revenue between the Iraqi government and the Kurdish authorities halted exports of oil from the region of almost a year ending in February 2011. The shutdown of the Elgin platform after the gas leak last week will reduce the volume of Forties available by around 60k b/d. The production losses will influence the quality of the remaining Forties blend. According to PIRA Platts has increased its sulphur de-escalator to normalise Forties prices to a consistent quality in the Brent dated equation. The Elgin/Franklin fields off the coast of Scotland provide about 15% of the Forties Brent, one of the four crudes used to price the European Brent benchmark. There is no oil to replace the lost barrels and thus despite the Forties quality deterioration, the effect will be bullish on oil prices as fewer cargoes will be available.

A stock release is only a only a temporary solution to a longer-lasting challenge

However, a US-led coordinated emergency stock release or hopes of a compromise with Iran can limit the upside potential for oil prices in the short term. Negotiations between Iran, the five permanent members of the United Nations Security Council and Germany are set to take place on 13-14 April in Istanbul.

The European oil import embargo on Iranian oil will begin in early July at a time when oil demand seasonally picks up as the US driving season starts and warmer temperatures increase the demand for oil to fuel air-conditioning systems. We will not be surprised if we see a US-led emergency stock release also this summer as the pressure will be growing on the Obama administration to tame petrol prices before the election.

A stock release will not take away the worries about the growing political tension in the world’s most important oil-producing region. Last summer the emergency stock release had a short-lived effect on oil prices. What will happen when the SPRs need to be refilled? Oil prices may move higher than forecast as the additional demand needed to refill the emergency stocks will tighten the market further. A stock release is only a temporary solution to a longer-lasting challenge – oil supply capacity growth is struggling to keep up with an expected rise in oil demand going forward.

We expect the Brent oil price to average USD 123/barrel in Q2.

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