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Marking oil to market for 2012


We set our USD 105/bbl price forecast last March when the Brent price had averaged USD 117/bbl and had reached USD 126/bbl. Although the Brent price has since retrenched sharply and we continue to expect substantial downside from current levels, a FY12 outcome of USD 105/bbl would require an improbably low Brent price for the balance of the year. Consequently, we are marking our FY12 Brent price to market. We forecast a YE12 price of USD 95/bbl, confirming our expectation that the price is at significant risk of further downside correction this year, despite the current tension in the Middle East. For the full year, we are increasing our average forecast USD 5/bbl to USD 110/bbl. We are leaving our forward forecasts unchanged at USD 95/bbl.

We retain our forward assumption for the Ural’s discount to Brent at USD 2/bbl but for FY12 we reflect the price to date and an average USD 1/bbl discount through the end of the year resulting in a USD 6/bbl increase in our FY12 forecast to USD 109/bbl.

We are cutting our WTI forecast, in line with the mechanical methodology of setting our WTI forecast in line with our Brent forecast, adjusted for the difference in forward curves. That results in a USD 3/bbl reduction in our WTI forecast to USD 88/bbl for FY12 and minor reductions prospectively.

Our oil-linked European gas price forecast is adjusted to reflect our revised oil price forecast and we continue to expect European hub gas prices to trade at a 10% discount to the oil-linked price from 2013. For FY12, although we would not be surprised to see European spot gas trade up to and even above the oil-linked price this winter, in light of the YTD average European spot price, we are cutting our FY12 forecast 4% to USD 331/kcm (USD 9.4/mmbtu).

As and when oil prices do come under significant pressure, it remains our view that OPEC will act to defend USD 100/bbl Brent, most likely as a result of Saudi willingness to take all or most of the roughly 1mmb/d off the market that it put on in summer 2011. However, there is some level of risk that Saudi Arabia will require cooperation from other OPEC members. In that event, the recovery process is likely to prove messier and more disruptive to oil prices.

Colin Smith, Marc Jacouris
VTB Capital analyst

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