In view of the elevated Brent price since the start of the year, we are raising our 2012 Brent price forecast, but only to USD 105/bbl.
We believe most of the current strength in oil prices can be attributed to concerns around Iran. In the meantime, OPEC supply is continuing to increase and looks set to rise further, we believe, ex any impact from Iran.
At current levels of OPEC crude production, the market is transitioning from two years of under-supply to a substantial over-supply position of some 1.3mmb/d for 2012.
While current inventory levels are comparatively low, reflecting the prior undersupply, we calculate that OECD days forward cover could rise to 62 by year end, the highest since 2Q95 and not consistent with even USD 100/bbl Brent, given the current level of over-supply.
We believe that there are three principal concerns around Iran: that it will attempt to block the Strait of Hormuz, that sanctions will substantially reduce output and that it might be the subject of a direct attack. In our view, the prospects that Iran will attempt to block the Strait are very low, as are the chances of a direct attack, at least while the IAEA has current levels of access to Iran’s nuclear programme. We expect the impact of the new US sanctions/EU embargo to be significantly less than the 0.8-1.0mmb/d impact reportedly expected by the market. And even if it were to be that large, current OPEC production levels would still exceed demand.