Bloomberg
By Grant Smith
Brent, the second-worst performer between April and June in the Standard & Poor’s GSCI commodity index, is forecast to rebound to an average $114.50 a barrel in the third quarter, according to the median estimate of 32 analysts tracked by Bloomberg. BNP Paribas SA, Deutsche Bank AG and Barclays Plc predict $110, $115 and $121 a barrel, respectively. Prices slipped as low as $88.49 last week.
Brent Crude to Rise to $121 by Year End, Croft Says
“We do look for a rebound and feel that the oil price has gone beyond economic fundamentals,” Michael Lewis, Deutsche Bank’s head of commodities research in London, said by phone on June 26. “We are in quite an extreme level of investor pessimism, which would only seem to us justified if the U.S. was going back into a recession.”
The prospect of a rebound in prices driven by sanctions on Iran illustrates the readiness of the U.S., Europe and their allies to suffer higher fuel costs in order to curb the Islamic republic’s nuclear program. The EU, Iran’s biggest buyer after China, stops importing the nation’s oil July 1. While reflecting an improvement in demand as major economies tackle the impact of Europe’s sovereign debt crisis, rising prices may also pose headwinds to a recovery.
Second-Quarter Slump
Brent has lost 24 percent in the quarter through June 26 to $93.02, its steepest slide since the 54 percent retreat in the last three months of 2008. Only cotton fell more among the 24 commodities in the GSCI index, sliding 26 percent. The MSCI World Index (MXWO) of stocks has declined 9.3 percent.
Concern earlier this year that measures against Iran might culminate in a wider disruption of Middle Eastern supply propelled Brent to a 3 1/2-year high of $128.40 a barrel on March 1. The rally prompted other members of the Organization of Petroleum Exporting Countries to increase production and the U.S., U.K. and France to consider releasing emergency reserves.
OPEC Reaction
OPEC, responsible for 40 percent of global supplies, resolved to constrain output at a June 14 meeting in Vienna because of “mounting” downside risks to the global economy and accumulating inventories. The group aims to pare back output to its official ceiling of 30 million barrels a day from the current 31.6 million barrels, according to Secretary-General Abdalla El-Badri.
While Saudi Arabian Oil Minister Ali Al-Naimi promised the following day that his country, OPEC’s largest member, will ensure that global markets remain adequately supplied, Morgan Stanley estimates that prices have fallen far enough for OPEC to begin delivering on its June 14 resolution.
“OPEC will start to dial back production” with Brent prices at about $90 a barrel, Hussein Allidina, Morgan Stanley’s New York-based head of commodities research, said in a report dated June 17.
Iran’s oil exports are declining 20 percent to 30 percent as the sanctions start, though that’s partly due to field maintenance, Deputy Oil Minister Ahmad Qalebani told reporters in Moscow on June 26.
Sanctions and Waivers
Adding to the EU ban, the U.S. has imposed financial sanctions on banks handling Iran’s sales, though several nations, including India and South Korea, have been granted waivers after proving they already “significantly reduced” the volume they buy from the Persian Gulf nation.
“Implementation of full sanctions” will cut Iran’s exports by 1 million barrels a day in the second half compared with last year’s levels, the Paris-based International Energy Agency said on June 13. The country exported about 1.5 million barrels a day in May, according to the IEA.
“The oil market will move into a seasonally-adjusted deficit as sanctions go into effect on July 1,” Jeffrey Currie and David Greely, commodity analysts at Goldman Sachs Group Inc., wrote in a report on June 11.
Oil exports from the Middle East, including non-OPEC members Oman and Yemen, will slip 0.5 percent to 17.58 million barrels a day in the four weeks to July 7, from the previous four-week period, led by a reduction from Saudi Arabia, Oil Movements, a Halifax, England-based tanker-tracking researcher, estimated in a June 21 report.
Most Banks Bullish
Spain, the euro-region’s fourth-largest economy, requested as much as 100 billion euros ($125 billion) from European rescue funds this month to shore up its banking system, the fourth member of the bloc to seek a bailout since the debt crisis began almost three years ago. Global oil demand will still increase by 2 million barrels a day, or 2.3 percent in the third quarter to an average 90.5 million a day, according to the IEA.
Consumption will be shored up by monetary stimulus in emerging markets such as China, according to Harry Tchilinguirian, BNP Paribas SA’s head of commodity-markets strategy in London.
“On the supply side, Iran’s production can easily fall as sanctions begin to bite, forcing the world to live with lower spare capacity,” he said in a June 22 interview.
Goldman Sachs said in a June 11 report that Brent will trade at about $120 a barrel and West Texas Intermediate at $115 in three months’ time.
A “long WTI position is compelling,” the bank said.
Volatile Outlook
JPMorgan Chase & Co. is among banks that remain cautious on a rebound. Brent futures will average $95 a barrel in the third quarter, down from a previous prediction of $120, because of a “stormy outlook” for the global economy, Colin Fenton, the bank’s global head of commodities research in New York, said in a report dated June 25. Even so, Fenton expects crude “may spend some time above $100” in the coming three months and there’s more potential for price volatility.
The recent decline in Brent crude futures coincides with the re-emergence of a contango market structure situation whereby there’s a price discount for prompt versus later deliveries, typically an indication that immediate supply is outpacing demand. The front-month Brent future on the London- based ICE Futures Europe exchange became as much as 38 cents cheaper than the second month on June 21, the biggest discount since Feb. 2, 2011, when that gap was 57 cents.
Central Bank Response
The U.S. Federal Reserve said on June 20 it will expand its Operation Twist program to extend the maturities of assets on its balance sheet, and said it stands ready to take further action to put unemployed Americans back to work. China cut borrowing costs for the first time since 2008 and loosened controls on banks’ lending and deposit rates, stepping up efforts to combat a deepening slowdown. The one-year lending rate was reduced by a quarter-percentage point to 6.31 percent, the People’s Bank of China said in a statement on June 7.
The focus on Europe’s debt crisis and the global recession has clouded assessments on the amount of oil that will be removed from world supply because of the Iran sanctions, Helima Croft, an analyst at Barclays in New York, said in a television interview on “Bloomberg Surveillance” with Tom Keene.
“We’re going to add basically another 500,000 off the market in Europe come July 1,” she said in the June 25 interview. “Our call still for the end of the year is $121 Brent.”
