(MENAFN - Kuwait News Agency (KUNA)) "Global economy slowdown in light of the negative outlook towards the economies of some countries, in addition to fears of a decline in demand for oil, will lead to ceiling the increase in prices of oil in global markets," said a report by Kuwait Finance House research division. However, the report adds that "despite current price turbulences, prices are expected to witness improvement in Q3 of this year as a result of an increase in demand in some areas."
The report noted that oil traded near the lowest level in a week and dropped back to below USD 90.00 per barrel (pb) as concerns heightened on the back of weakening fuel demand, as Europe's debt crisis threatens to derail the global economy. Prices are down 11.0 percent year-to-date.
On the credit rating front, the report recalled that "Selling may continue this week as Moody's Investors Service late on Monday revised to 'negative' from 'stable' outlook on the Aaa sovereign ratings of Germany, the Netherlands, and Luxembourg ... Nevertheless, the negative outlook does not necessarily indicate an imminent downgrade.
"Moody's also cited the huge potential costs of a euro breakup, with increasing risk of an exit by Greece from the euro area ... It cited that the material risk of Greece exit from the euro-area exposes core countries such as Germany to a risk of shock that is not commensurate with a stable outlook." Under the heading "Disruption in oil supply", the report said that "Oil prices could be higher than projected if recoveries from the disruptions are slower than forecast and if more unexpected disruptions occur, as this may lead to lower than expected oil supply. "The EU sanctions, including an embargo on Iranian crude and an insurance ban on tankers carrying Iranian oil, became fully effective on July 1, shortly after the latest set of US sanctions entered into force.
"According to the EIA, the US has issued exceptions to all major importers of Iranian oil from sanctions that could have been imposed on foreign financial institutions which facilitated oil-related transactions with the Central Bank of Iran, but only after they had demonstrated or pledged significant reductions in their purchases of Iranian crude oil." The report also touched on fluctuation of global economic recovery. "The global recovery is faltering and the worsening euro-zone debt crisis has eroded demand for fuels.
The deteriorating economic situation in the euro-zone would pose a downside risk to global oil demand and prices. Recently, the International Monetary Fund (IMF) slashed its global growth projections to 3.5 percent in 2012 and 3.9 percent in 2013, from its earlier projections of 3.6 percent and 4.1 percent, respectively in the April 2012 World Economic Outlook (WEO).
"However, market's positive reaction to recent EU negotiations indicates oil prices may fluctuate in both directions as perceptions about the likelihood of a deeper crisis evolve. For 2012, oil consumption in Europe is expected to fall by 0.3 million bpd from last year's level and by a further 0.
4 million bpd in 2013," the report said.
"Despite the volatility in oil prices, we remain positive on the oil and gas sector. Oil demand is expected to reach its seasonal peak in 3Q12, reflecting both the US driving season and increased oil use for electricity generation in the Middle East.
"Following rising uncertainties in the global economy, we project that world oil demand will reduce in the second half of this year. Meanwhile, total global oil supply is expected to increase to 89.1 million bpd in 2012, 0.9 million bpd higher than the previous year. However, the forecast continues to be associated with a high degree of risk, such as political tensions, technical and weather-related issues, as well as maintenance."