July 2, 2012
Despite additional US/EU sanctions against Iran and a strike by Norwegian oil workers, the rebound in crude oil prices quickly ran out of steam this week. Front-month Brent futures recovered towards $93/barrel after dipping below $90 (WTI: $80) last week, nearly 30% off April highs. The major drivers of the correction have been slowing global demand (especially from Europe), ample supply (OPEC at multi-year high), easing concerns about an imminent military escalation of the Iran conflict, the stronger dollar as well as generally lower risk appetite of investors.
The recent correction appears logical, given weaker fundamentals and the – for now – lower geopolitical risk premium, but the long-term uptrend in crude seems still intact. Barring a renewed global recession or escalation of the euro debt cisis, OPEC (read: Saudi Arabia) should be in a fairly strong position to prevent a further sell-off and to maintain sufficient oil revenues via timely production cuts. Our colleagues estimate that GCC countries currently need an average break-even price of around $80 (Brent equivalent) to balance their budgets (Russia: $116). Thus, we would expect any price drop to well below that level to be temporary.
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