Oil price forecast: Perfect storm to fade soon
Perfect storm for lower oil prices to fade soon
We have lowered our baseline average Brent oil price forecast to USD 114/bbl for 2012E and to USD 118/bbl for 2013E.
- Uncertainty surrounding the oil price outlook is higher than in a long time. Medium term oil balances have weakened since March on a combination of weaker demand and higher supply. The lower global growth trajectory now expected slows the pace of oil demand growth recovery. Lower oil prices provide some counterbalance for demand.
- Forward-looking indicators for economic growth and oil demand have turned south in Q2, while OPEC has flooded the market with oil ahead of the Iran embargo. We expect the market to re-focus on the limited effective spare capacity when crude stock draws occur in H2.
- We still believe EU/US sanctions and oil embargo against Iran to go ahead from 1 July and the risk premium to increase in H2 from very low levels currently.
In our baseline scenario, we expect the near “perfect storm” for oil prices to fade soon and prices to regain momentum in Q3 and onwards on a combination of tightening oil fundamentals and renewed tensions between Iran and the West.
Our baseline scenario for higher oil prices is based on the following near term assumptions:
- Failure to reach an agreement between Iran and the permanent members of the U.N. Security council + Germany (P5+1) in June.
- Full implementation of EU embargo/US sanctions from July and increase in the “risk premium”. Military conflict is avoided and Iran capitulates by the end of the year.
- No “Greek exit” in the near-term and abatement of Eurozone break-up fears.
- Quantitative easing (“QE3”) from the Fed in June.
- More aggressive fiscal and monetary stimulus announcements in China.
A less benign macroeconomic and policy development than assumed above adds downside risks to our near term forecast. A weaker oil balance due to lower demand growth nevertheless results in a significant downgrade of the medium term oil price path compared with our March/May forecast.
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