Having recovered from the lows of late June, crude prices have rallied sharply over the last two weeks or so, with Brent up about 8% since early August in a move closely echoed by other crudes.
Economic data remain mixed but generally fairly weak and oil supply/demand data continue to suggest that the market is oversupplied, albeit less so in Q3 as seasonal maintenance cuts into output.
In our view, the prime causes of the rally are likely to be anticipation of the potential loss of Iranian volumes as a result of sanctions but more particularly by the sharp increase in rhetoric from Israel over the potential for a military strike against Iran in what looks to us like a rather aggressive attempt to put pressure on President Obama in the run up to the Presidential election in November to take an even tougher line on Iran.
The rise in gasoline prices is so politically sensitive to the election that it has prompted talk of a release from the Strategic Petroleum Reserve (SPR) in what would be a blatant attempt to bring the price down as there is absolutely no current supply problem, most especially in the US, in our view.
Despite the talk, we believe that it is highly unlikely that Israel will launch a unilateral strike at this time and we believe it is also very unlikely that the US would be supportive of such action. History suggests that talk without action is unlikely to be able to maintain elevated price levels for too long; if and when it becomes clear that military action is not imminent, there is scope for a sharp sell-off in the price from here, we believe.
Managed Money net longs on Brent have risen 60% since the middle of July but it is notable, we believe that total net non-commercial futures and options positions on Brent eased by 0.4% for the week ending 14 August, the most recent data point.
We retain our USD 105/bbl FY12 Brent forecast that we set last March when the then YTD average was USD 117/bbl and the price had just hit USD 126/bbl.