Last Updated: Thu Apr 26, 2012 13:23 pm (KSA) 10:23 am (GMT)

Oil to rise on Iran, capacity concerns after Q2 hiccup

Reports that Iran was considering a plan designed to slow its nuclear enrichment program temporarily knocked as much as $2 off oil prices. (Filel photo)
Reports that Iran was considering a plan designed to slow its nuclear enrichment program temporarily knocked as much as $2 off oil prices. (Filel photo)

Oil will rally through the year on Iranian tensions and as top producers pump at near full capacity though the second quarter looks set for a traditional seasonal weakening in prices, a Reuters poll showed on Thursday.

Analysts remain bullish on the overall outlook for Brent, as outages and the prospect of an export ban from Iran continue to support the contract.

“While the Iran risk premium has come off a little, the situation still looks far from resolved,” NAB economist Michael Creed said.

Brent crude futures will average $117.30 per barrel this year, based on forecasts from 38 analysts, a $2.60 increase from the previous poll in March.

Analysts have raised their forecasts in each of the last four monthly polls, by a total of $12.10 per barrel or more than 11 percent.

Fewer than half of the analysts in the latest poll expect prices this year to average more than $120 per barrel, the price forecast by Goldman Sachs, which is often described as a ‘perma-bull’ on oil by its competitors.

The higher forecast in April’s poll tracks Brent’s year-to-date average of just under $119 a barrel.

The contract posted strong gains during the first quarter, when it rose to highs of $128.40 per barrel. It has since fallen by more than 7 percent to trade at around $119 a barrel.

Societe Generale has the highest forecast in the poll, calling for Brent to average $127.40 per barrel in 2012, or more than $8 above the current price.

The bank’s global head of oil research, Mike Wittner, says that the pledge from top producer Saudi Arabia to tame prices will squeeze spare capacity, leaving the market more vulnerable to other production outages.

“Higher Saudi production will tighten spare capacity even further. This is the primary driver behind our bullish crude oil price outlook,” Wittner wrote in a note.

Saudi’s elevated pumping rate is having another effect on the oil market - inventories in the kingdom are rising, according to Goldman Sachs.

“We believe Saudi is building oil inventories in order to meet its domestic seasonal upswing in oil-fired power generation demand this summer, without having to severely reduce exports,” GS analysts David Greely and Stefan Wieler said in a note.

“In our view, it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply.”

Barclays analysts said that output from the Organization of the Petroleum Exporting Countries (OPEC), which pumps around a third of global oil supplies, is running at its highest ever level.

“We expect OPEC to continue to allow global inventories to rise for a while, albeit at the trade-off of running at low levels of sustainable spare capacity.”

Q2 weakness

Despite the bullish forecasts for the full year, many analysts see Brent softening during the second quarter, as recent strength in prices dents demand and makes a U.S. coordinated stock release all the more likely.

Outages and geopolitical worries have supported prices so far this year, but the head of commodity research at Morgan Stanley, Hussein Allidina, sees limited upside in the absence of a supply shock.

“Risks are skewed to the downside, particularly if outages resolve, SPRs are released, or geopolitical tensions recede,” he said in a note.

“While we are also nearing the seasonal lows for crude demand, high prices will likely cap the demand rebound. High prices will also likely support elevated OPEC production, resulting in bearish inventory trends”.

This shift in sentiment is illustrated by a recent drop in the number of speculators betting that crude benchmark prices will rise.

The head of commodity markets strategy at BNP Paribas, Harry Tchilinguirian, also expects a fall in prices during the second quarter due to weaker demand.

“In the short term, the oil balance seasonally weakens in Q2’12 from the oil demand side,” Tchilinguirian said. “Notably we see a pullback in prices from the February-March highs as we head into the second quarter.”

A report that Iran could be considering a plan designed to slow its nuclear enrichment program temporarily knocking as much as $2 off prices on Wednesday.

Some analysts see the risk premium associated with Iran is ebbing, potentially implying a further price softening.

“Add in a sluggish global recovery, fading risk appetite and a stronger U.S. dollar, and Brent should be back below $100 by the end of the year,” said Julian Jessop, chief global economist at Capital Economics.

Eyes on central bank, China

Expectations for a further round of loose fiscal policy from central banks in Europe and the United States are expected to support Brent futures in the medium term.

Brent will average $115.40 a barrel in 2013, the poll showed, up from the March forecast of $113.40.

“The ultra-expansionary monetary policy of the central banks should spur investment demand. Risky assets such as crude oil are likely to benefit from corresponding capital inflows,” Commerzbank commodities analyst Carsten Fritsch said.

Previous interventions by the U.S. Federal Reserve to improve liquidity have seen large influxes of ‘hot money’ into commodities. Brent prices surged by around 30 percent between November 3 2010 and June 30 2011, the second round of quantitative easing by the Fed.

“Central bank policy responses to market shocks are likely to limit the oil price downside which should see prices rebound heading into the second half of 2012,” said Gain Capital’s Daniel Hwang.

China, the world’s top energy consumer, will remain a key factor for crude oil prices in the longer term.

Barclays analysts expect that growing car production and ownership will spur commodity demand over the next five years.

“This will support rapid growth in demand for transport fuels and the materials used in auto manufacture,” they said in a note.

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