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Energy Prices Update


Continuing, widespread disruption to production in Libya has cut OPEC output and effectively reduced spare capacity at the same time as geopolitical tension has escalated in Egypt and now spiked up in Syria. In our view, the more important driver for oil prices is likely to be the extent to which the central authorities can rebuild production in Libya, despite the focus of attention on Syria. While the supply situation is set to ease toward the end of the year and into 2014, current circumstances warrant a USD 3/bbl increase in our FY13 Brent price forecast to USD 109/bbl.

The tear in Brent which started in July continued in August with a USD 6.31/bbl increase in price in the month to USD 114.01/bbl at month-end, taking the price increase over the last two months to almost USD 12/bbl. The highest August close was USD 116.61/bbl, a level not seen since late February and the average for the month was USD 110.36/bbl.

Production data confirmed that OPEC production fell again in July as the production disruption in Libya intensified and despite another MoM increase in Saudi Arabian production. Initial indications are that OPEC production might have stabilised or increased slightly in August but remains at a level which might or might not be sufficient to balance the market in a geopolitical context which is febrile.

With the oil price already jacked up on the back of falling OPEC production and mayhem in Egypt, the large-scale, lethal gas attack in Damascus on 21 August sharply increased the risk of overt, Western military involvement, further driving up the oil price. However, as the US has made clear, any such action would be sharply prescribed, lessening the risk that it will end up having broader ramifications for the supply position in the global oil market. We believe markets recognise this, otherwise we would have expected the oil price spike to have been more aggressive. Provided any eventual action proves to be restricted and the fall-out limited, we would expect its impact on the price to be relatively short-lived with the overall current tightness in the market proving the larger concern.

Brent looks likely to remain elevated until the outcome of any new military action in Syria becomes clearer. We have raised our FY13 forecast for Brent USD 3/bbl to USD 109/bbl and made minor changes to some of our other oil and gas price forecasts.

Colin Smith, Marc Jacouris
VTB Capital analyst

OPEC, oil

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