The outlook for oil prices is highly uncertain
Despite a softer fundamental supply/demand balance, the Brent oil price is still hovering around USD 110/barrel as the political risk premium has increased markedly since mid-December. Total oil supply is rising as Libyan oil production is recovering and Saudi Arabia and the UAE have increased production at a time when oil demand suffers from higher-than-normal winter temperatures and weak global growth prospects for H1 2012. Looking at the fundamental situation alone, oil prices should have traded closer to our Q1 oil price forecast from 1 December at USD 107/barrel.
Increased political risk
Political risks have increased markedly since mid-December, putting at risk oil output from major oil producing countries such as Iran, Iraq, Nigeria and Sudan. Worries that supply disruptions may limit oil flows to the global oil market have pushed up the risk premium by on average USD 5/barrel so far. In recent weeks Iran’s nuclear programme once again topped newspaper headlines across the world and clearly the risk that this dispute may develop in a negative direction will continue to hold up oil prices in the weeks to come if Iran does not return to the negotiating table soon.
A highly uncertain outlook for oil prices
We expect oil prices will trade around the current level at USD 110/barrel if the verbal war between the West and Iran continues, but we see no further actions from any side intensifying the situation further. If Iran puts into action any of its threats as a response to the US and EU sanctions and oil embargo such as cutting oil deliveries to the EU from this week or even worse closing the Strait-of-Hormuz, oil prices could move up significantly from today’s level depending on the severity of the action. In contrast if political risks fall markedly, oil prices are expected to move closer to our oil price forecast for Q1. The next direction in this race is highly unpredictable with Iran behind one of the steering wheels – leaving the outlook for oil prices highly uncertain.
Thina Margrethe Saltvedt
Senior Analyst
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