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Oil price forecast increase - Brent forecast raised to USD 105/bbl

 
01.03.2013

In order to reflect the strength of oil prices at the start of the year and a more proactive approach by Saudi Arabia, we are raising our Brent forecast for 2013 to USD 105/bbl and our forward forecasts to USD 100/bbl. We continue to see the market as being over-supplied, with the risk to current oil price levels lying to the downside.

Brent has averaged USD 114/bbl YTD, which already sets a reasonable platform for a full-year average above our current USD 95/bbl FY13 forecast.

Oil markets transitioned to 2013 tighter than we expected, mainly as a result of OPEC production cuts, driven principally by a sharp Saudi production drop. We believe that reflected a more pro-active approach to supply management on the part of Saudi Arabia than we had expected, given oil prices well above Saudi Arabia’s USD 100/bbl price objective. While it is possible that the price objective is changing, we think it is more likely that Saudi Arabia misjudged how much crude the market needed. We expect that the sharp cut in pricing differentials to the Far East for March will result in an increase in Saudi production.

Even at current OPEC production levels, the market looks over-supplied, with demand growth of some 1% and non-OPEC supply double that, driven by light tight oil production growth in the US. With OPEC production likely to grow from March, if not February, just as the seasonal oil demand retreats, we continue to expect that the near term direction for oil prices is downward from current levels.

While fears of ‘peak oil’ are receding as North American liquids rich shale production jumps, production growth elsewhere in non-OPEC remains a challenge. We do not currently see markets becoming so long in oil that OPEC’s ability to manage the market would be overwhelmed.

Issues around Iran continue to have the potential to drive oil prices, although probably less so in 2013 than in 2012, in the absence of actual military action, as Iran’s exports have halved, spare capacity elsewhere in OPEC is growing and inventories have recovered. Real progress on a deal with P5+1 seems elusive although not impossible, we believe. Tensions elsewhere in the MENA region are likely to prove price supportive but not definitive, we expect.

We make comparatively minor adjustments to the remainder of our oil and gas price forecasts, many of which are linked to the change in our Brent forecast. We also introduce quarterly Brent forecasts for the first time. 

Colin Smith, Marc Jacouris
VTB Capital analyst

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