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MENAFN - Arab News - 22/11/2012

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(MENAFN - Arab News) After Libya last year, 2012 has again been notable for geopolitical disruptions to oil supply. These have affected Iran, Sudan, Syria, and Yemen and have led to an estimated 1.2 million barrels per day (mbpd) loss in output during the year.

Much of this has been offset by the steady return of Libyan supply which has added around 1 mbpd. Gains in non-OPEC crude and global NGLs have also been strong this year. But it is the action of Saudi Arabia which has been the main factor dampening price pressures stemming from the supply disruptions, and making sure markets are comfortably supplied, according to a report by Samba Financial Group.

Along with other GCC producers, Saudi Arabia has continued to increase production to offset supply disruptions, and to meet rising global demand which is expected to be up by around 1 percent in 2012, or 0.9 mbpd. Demand growth continues to be driven by emerging markets while consumption in developed economies contracts again, accentuated by recession in Europe and the stuttering US recovery. In these circumstances, Saudi Arabia's increase in output to just over 10 mbpd since April has kept fundamental market conditions well balanced. Even with the Iranian disruptions, OPEC production has been running above the estimated call on its supply for the year - generally estimated at around 30.5 mbpd, and close to OPEC's own 30 mbpd quota, the report added.

Despite the relatively healthy fundamentals, prices have come under renewed upward pressure as markets worried about geopolitical risks to supply, particularly the July implementation of sanctions on Iran, and the reduction in spare production capacity given the increase in Saudi output. Counteracting this have been concerns over the euro zone crisis and global growth. But these eased off in the second half of the year after the ECB stated that it would "do whatever it takes" to preserve the euro and subsequently introduced an unlimited sovereign bond buying program.

Another round of quantitative easing in the US also provided a boost.
Oil prices have fluctuated over the year with Brent rising to a high of 121 per barrel in March before slumping to 90 per barrel in June. Prices have recovered since and were running back over 100 per barrel early in the fourth quarter. Brent has held within a 90-120 per barrel trading range since late 2010, and the average price for 2012 is expected to come in at close to the record 111 per barrel recorded last year, the Samba report said.

Market uncertainty

The oil markets head into 2013 facing continued uncertainty, much of it related to pending global political developments. The Iranian nuclear impasse remains a key issue given the escalating threat of an Israeli air strike, as does the conflict in Syria which threatens to spill over its borders. Meanwhile the modalities of the ECB bond buying program still need to be clarified; Greece is hanging on by a thread, while moves towards banking and fiscal union in the euro zone face many political hurdles and implementation risks. In the US, elections need to be swiftly followed by political agreement on reducing the large scheduled tax increases and spending cuts (the so called "fiscal cliff"). Failure to do so could tip the economy back into recession, and even in the expected best case scenario fiscal policy will be a significant drag on growth in 2013.

Demand outlook

Peering through this fog of uncertainty, the Samba report said that global growth will remain muted in 2013 at around 3 percent, similar to this year, with some pick up in 2014. This assumes no country leaves the euro zone, and that US politicians curb the full impact of the "fiscal cliff". Emerging markets retain room for policy stimulus which they have already begun to activate in the face of slowing global growth and trade. This should allow them to maintain positive growth momentum, although there is likely to be general shift down in growth potential, particularly in China.

In this environment annual global oil demand growth will remain at around 1 percent or approximately 0.9-1 mbpd. Again this will be driven entirely by growth in emerging markets, as demand is expected to continue contracting in North America and Europe, albeit at a diminishing rate. China and India will remain key sources of demand growth, absorbing around 450,000 bpd and 120,000 bpd respectively in 2013. Demand in Saudi Arabia is also expected to remain strong accounting for another 300,000 bpd. By 2014, better conditions in the US and Europe could see a tempering or even halt to demand destruction, helping raise global demand growth by just over 1 mbpd to close to 92 mbpd.

Supply conditions
Global supply conditions appear to be on line for a steady improvement in 2013-14, despite the expected continued disruption from sanctions on Iran which seem likely to be intensified next year. Assuming that there is no military confrontation sanctions should keep Iranian output constrained to around 2.7 mbpd or less, down from around 3.5-3.6 mbpd. During 2012 this supply shortfall was largely offset by higher Saudi production, but as we move through 2013 the anticipated return of Sudanese supply, increasing Iraqi production, and healthy gains in North America will increasingly take up the slack. As a result it seems likely that Saudi Arabia will need to rein in production during 2013 in order to manage what could be a growing supply overhang.

The expected weakening in market fundamentals and improved spare capacity outlook should exert downward pressure on prices over the next couple of years. Furthermore downside risks to the global economy remain high, with potential policy missteps over handling the US "fiscal cliff" and the on-going euro zone debt crisis threatening to drag the world back into recession. Given the sustained uncertainty, the average price for Brent will hold at around 100 per barrel in 2013, down from an estimated 110 per barrel this year, before slipping to 98 per barrel in 2014.

Prices may well fluctuate sharply over the outlook period as markets respond to conflicting developments. Nonetheless the prices should remain within their current trading range of 90-120 per barrel aided by Saudi Arabia's position as effective swing producer. Given its current high production levels, the Kingdom could comfortably cut output significantly to shore up prices if necessary, and would likely act if prices were to dip below 90 per barrel for any length of time.

Conversely, the Kingdom would seek to increase production should there be a supply shock and keep prices from exceeding 120 per barrel at which level global growth is likely to suffer.


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