Geopolitical risks to support the oil price – despite demand growth drop

THE BOOST the energy sector received up until early March is unlikely to be repeated as we move into the second quarter. Oil traders will be keeping an eye on several issues.

China, the world’s biggest importer of oil, saw a dramatic reduction in February imports, after a record high in January. If this trend continues, demand growth could eventually have to be revised lower. Meanwhile, the hope of reaching a comprehensive agreement between Iran and the West over the former’s nuclear intentions may have suffered a setback, given the breakdown in relations between Russia and the US over Ukraine. Iran has been exporting more than allowed under Western sanctions for the past four months, and this increases the risk of a crackdown if Washington feels economic pressure is being relaxed too quickly.

Russia’s involvement in helping to bring the Syrian conflict to a end may also have suffered a setback. This could potentially also destabilise the situation in Iraq further, not least considering the upcoming parliamentary elections this month. Libya’s oil production remains disrupted, and problems in the country look like they will become chronic, as a weak government fails to deal with rebels that have been disrupting supplies since last August.

Plenty of ongoing geopolitical risks will continue to keep oil markets supported and keep speculative investors from relinquishing their overall bullish exposure to the market. On balance, however, we continue to expect the average price of Brent crude to move lower towards $105 per barrel, but see limited downside risks below $100 per barrel. We see double-digit prices as a strategic buying opportunity.

Meanwhile, the US shale revolution is unlikely to reach Europe anytime soon, unless a strategic decision is made in the US to protect Europe with more than just military support. There is still a lot of resistance to shale gas exports from within the US, as the manufacturing industry fears that it could lose the competitive advantage that cheap gas provides. Further, the price of gas in Asia is currently much higher than Europe. So unless geopolitics gets in the way, US exports are expected to go in that direction. The first US export terminal will not open until late 2015, and already-established long-term contracts with South Korea, Japan and Indonesia should see gas move west from the US, not east.

Ole Hansen is head of commodity strategy at Saxo Bank.

Add a Comment

In Other News