Oil prices rebound since IEA reserves release

Oil prices are drifting upwards again. On 5 July, European benchmark Brent crude futures for August traded at $113.61 a barrel, having eased to $105 a barrel over the past two weeks following the release of strategic stocks held by the Paris-based International Energy Agency (IEA). US West Texas Intermediate (WTI) contracts remain below $100 a barrel at $96.89 a barrel.

On 23 June, the IEA seized the initiative from oil producers’ group Opec, in particular Saudi Arabia which failed to rally enough support to agree on increasing production quotas to cover the shortfall of light, sweet Libyan crude going to Europe in peak demand season.Believing the kingdom would be able to wield its considerable influence over the group, traders bid down the price for oil futures, expecting markets to loosen.

The price quickly rebounded when Saudi Oil Minister, Ali al-Naimi proclaimed the 8 June Opec meeting as “one of the worst” ever held.Opec initially called for the IEA to halt its release, but the initial reaction to the IEA’s release has worn off. Brent traded at $110 a barrel before the release and is now back at $113 a barrel.

Demand forecast for 2012

London’s Barclay’s Capital sees oil demand growth of 1.38 million barrels a day (b/d) for 2012, marginally down on the current 1.68 million b/d forecast for this year.Global demand is expected to average above 90.6 million b/d for the first time ever. The estimate is predicated on the assumption of continued trends in non-OECD countries; where the quest for both industrialization and urbanization has dominated oil use, despite high inflation and tight monetary policy.

As a result, analysts at Barclays Capital say they “expect further reduction in spare capacity over the coming years along with the steady erosion of inventories, creating an environment supportive for a steady upward movement in price levels”.Oil prices in 2011 are expected to average $112 a barrel. There is unlikely to be any respite in 2012, with Brent expected to remain in the hundreds at a $115 a barrel average. WTI prices, however, will remain dislocated.