Oil prices have fallen below its psychological levels, notably with Brent and WTI fading below $100/bbl and $85/bbl respectively. Given the shift in focus from geopolitical concerns between Iran and the Western powers to the deepening Eurozone banking concerns, the fall in prices from their 2012 high is not surprising. However, key fundamentals have radically evolved over the span of three months, which ultimately convinced us that crude oil prices are set to decline further to late 2010 levels by end year.
The key driver for bearish oil prices going forward remains very much driven by the same reason which brought about inflated oil prices in early 2012: easing of geopolitical tensions between Iran and the Western powers. With the Iranian oil talks next week, the knowledge that high oil prices may potentially derail what is left of global growth while a cash-strapped Iran is eager to unwind the potential embargo placed on them starting July may persuade global powers (and Iran) to finally concede for a mutual win-win situation.
The easing of concerns over a negative Iranian supply shock has thus naturally led the market towards a more bleak picture of global economic fundamentals especially market concerns about a potential Greek exit (or commonly known as a Grexit) and the recent spotlight on Spain. The euphoria from a EUR100bn Spanish bailout agreement faded in a matter of hours, with Spanish 10-year bond yields surging to record high since 1997 suggest the gravity of risk aversion sentiments in the markets. In this light, we continue to observe bearish signals illustrated in falling equities, slowing OECD leading indicator and declining US gasoline demand over the past 2-3 months (see appendix). Thus, crude oil, as a growth-dependent commodity, will likely see a sustained fall in prices should global sentiment worsen.
Our crude oil demand/supply and econometric models point towards a sustained decline in oil prices. Firstly, the dynamics between demand and supply is startling, with the global economic slowdown to drag oil demand further while oil supply is expected to stay high due to fears of higher oil prices. According to IEA, oil demand is expected to rise by 1.3mbpd while supply is to grow 1.6mbpd in 2012. More importantly, the amount of global production of crude oil has lately overtaken global demand, according to the Energy Intelligence Group, thus providing another piece to the puzzle as to how prices will trend going forward. Our econometric model which attempts to create an oil fitted line likewise suggests that current oil prices are still inflated and points a sustained downward trend.
With the shift in focus from the negative Iran oil supply shock to the deepening Eurozone debt concerns and global growth slowdown for 2012, it is likely that Brent prices continue to see lower levels. In addition, note the record high oil inventories in the US, coupled with the global crude supply surplus at latest observation. The caveat being should the Iranian talks on 18 – 19 June fail, it may prompt the EU to initiate the embargo against Iranian oil imports on July 1. Also, any further accommodation by the Fed at its next FOMC meeting may allow for a knee-jerk risk-on reaction to the market, which could lead to a short-term rise in oil prices. Barring these wildcards, our base case scenario depicts a slowing global economy scenario and we look for Brent prices to touch $90/bbl at year end.
Source/Extract/Excerpts/来源/转贴/摘录: OCBC Research