(MENAFN - Arab News) Oil prices have been rising for nearly three months, despite healthy supply levels. QNB Group explains that the rise has been the result of a range of factors.
These include geopolitical risk concerns, local supply dynamics and less pessimism about the US economy.
Prices were high during much of the first quarter of 2012, when the benchmark Brent crude traded close to 125 a barrel. Prices eased in April, and then slid substantially in May and June, to a low of 89. This slide was driven by concerns that opposition parties would win an election in Greece.
The market feared that such a result would lead to the country exiting the euro, damaging confidence in the single currency and potentially sparking a recession in the region which would reduce its oil demand. At the same time, there were signals of economic deceleration in key emerging markets, such as India and China, responsible for much of world oil demand growth.
Prices began to rebound soon after the Greek election on June 17, as the market's fears were not realized. The rebound has continued since then, with a few brief corrections, despite a stream of negative economic data and concerns about Spain's banks and its indebted regional governments. In early August, the market has been buoyed by fresh hopes the European Central Bank will ease the euro zone debt crisis by buying government bonds. In addition, stronger than expected job creation in the US has been interpreted as a sign that the economy may be recovering, although unemployment remains at 8.3 percent.
There are also hopes that monetary easing in China will help maintain its economic growth rate above 7 percent. These factors pushed Brent up to 112 a barrel on Aug. 7, its highest level in nearly three months.
Other factors that have contributed to the recent rise in oil prices include geopolitical concerns in oil producing regions, such as current events in Syria along with the supply impact of sanctions on Iran.
Local factors have also come into play. Brent oil, from the North Sea, provides a pricing benchmark for most of the world's crude oil, with the remainder largely trading the West Texas Intermediate (WTI). Until late 2010, these two major crudes traded within a few dollars of each other, but a glut of pipeline oil in the central US has pushed down the value of WTI relative to Brent, which is traded by tanker.
Brent's premium on WTI had halved during the second quarter of 2012, but it has since rebounded. In part this is because scheduled maintenance operations in September on some of the largest North Sea fields, such as Buzzard and Troll, are due to temporarily reduce supplies of Brent. This reduced supply would tend to push up prices, and indeed the premium of Brent over WTI has increased steadily since mid-June, accounting for about a third of the increase in Brent prices since then.
The strengthening oil price has come in spite of healthy supply levels. The International Energy Agency (IEA), estimates that global supply exceeded consumption demand by 2.1m barrels per day (bpd) in the second quarter of 2012, the highest level in many years.
The fact that prices have remain buoyant despite this excess supply is evidence that geopolitical risk factors are being factored into the price. The balance of supply over demand turned positive in the first quarter after two and a half years of undersupply.
This period of undersupply had eroded stocks, and so the extra supply is now enabling countries such as China to rebuild their stockpiles.
Looking ahead, global oil demand is forecast by the IEA to average 88.9m bpd during 2012, 0.8 million bpd above 2011, and to increase by a further 1 million bpd next year.
The current supply is sufficient to meet these demand levels, and additional supply is expected to come on stream in Iraq as well as unconventional crudes in the US and Canada. In addition, Southern Sudanese oil should return to the market following an agreement last week over pipeline transit fees with Sudan, which had halted exports this year.
QNB Group expects that these fundamentals will keep a lid on average oil prices, which are unlikely to exceed 110/barrel in either 2012 or 2013.
However, short-term risk factors and sentiment may occasionally create price spikes. Conversely, any further economic deterioration in the euro zone or elsewhere would dampen oil prices.
