Oil market to stay tight for longer

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.

There are numerous possible scenarios for how the implementation of the embargo plays out. In our baseline scenario OPEC’s effective spare capacity falls below the comfortable level of 3% of global supply this year as the rest of the cartel, notably Saudi Arabia, steps up production to replace most of the “lost Iranian barrels”. The net effect is expected to remain bullish for oil prices, which have already moved USD 10/barrel higher since mid-December.

Meanwhile, forward-looking indicators for economic growth and oil demand growth have turned up, while liquidity-boosting measures from the world’s most powerful central banks increase appetite for risk assets, including oil prices.

Consequently, we have raised our baseline average Brent oil price forecast for 2012E to USD 118/barrel from our 1 December forecast of USD 109/barrel. Our 2013E forecast is adjusted slightly higher to USD 122/barrel from USD 120/barrel previously.

Other news

Week ahead: Central bank intervention looming?

18 May 2012 | Jan von Gerich

All eyes remain on anecdotal news on how depositors in Greece and outside the country are reacting to the recent events. In terms of economic data releases, the main focus will be on flash PMIs for May.

China: PBoC cuts reserve requirement rates

18 May 2012 | Annika Lindblad

The central bank (PBoC) cut reserve requirements by 50 bp last weekend, thus continuing to ease monetary policy. However, the pace remains slow, and we do not think the PBoC is done yet.

Government Bond Market Update

18 May 2012 | Gaute Langeland

The upcoming auction has potential to disappoint. Positioning in the market is less supportive than it has been for a long time as dealers are no longer short and unlikely to continue buying much more supply at current levels.