Miswin Mahesh, Commodity Analyst at Barclays, on oil prices

I think the timeline that we are looking at is certainly showing an increase. However, over the last 3 years, crude has not really risen. If we look at Brent prices, in 2011 we see an average price of $111 a barrel, 2012 - $112 a barrel, and so far this year we are seeing $113 a barrel. We do observe month-on-month volatility, but over the last 3 years, the price level has averaged around that mean. However, that said, I do agree that for the first time ever the OPEC basket has been above $100 for such a long period. Nevertheless, the market is quite balanced and it is not a situation, where demand substantially exceeds supply. The non-OPEC's supply shortfall is still there, while the demand is still increasing and we expect a 1% growth. However, the story for this year is likely to be one, where we are going to see a boost in demand as well as some respite in non-OPEC's supply shortfall. Some of them are going to improve, but some of the structural ones are still going to remain as they are. I think that the important thing is that we have got a couple of new projects coming, which will add a few barrels to the market. 

On the global side, fundamentals look fairly balanced, thus we will see crude to trade within this range that we are the moment. That said there are several geopolitical factors on the background, for example Yemen, the Iranian issue and Iraq's domestic political backdrop, which is also very fragile. The reason why Iraq is quite important now is that for the first time last year we saw Iraqi supply increase over Iranian supply, and Iraq has become the second largest supplier in the OPEC pool. As much as that is a good thing, given the fragility that the country experience, that is something that we watch out for. If we weigh both the macroeconomic risks to the prices and the geopolitical risks, certainly it points to the upside. Other than that, unless we get a trigger we would see prices move within this range and we do not see a situation, where prices would come off. 

A very common question for the market is whether an increased supply from the North America's side is going to have a significant effect on prices. The answer to that is - this is the North American phenomenon, and we are not going to see supplies getting into the global market due to several reasons. First of all, they do not export crude, and secondly we are still in a period, where there are a lot of differentials in the U.S. that are shifting around. In absolute levels, crude supplies are still in an infant stage, with growth levels still being quite high. We believe that is set to continue. Besides, on the global market, we still have the non-OPEC's supply shortage. Besides, we believe that geopolitical risks that could push the prices higher.

Those costs actually pertain to the OPEC producers, who have very low cost base. However, it is actually a lot higher than the $25-30 mark. The key OPEC producers in order to balance the budget after the Arab Spring last year, increased social spending and military expenditures, do require much higher amount than the actual costs of producing are. Those levels are higher with some of these key OPEC suppliers having stated that they are comfortable above $90 a barrel. However, prices below that level breach their comfort zone, thus they would have to manage supplies in order to meet the expectations for prices.

Still, I think the most important thing of that question is obviously the additional supplies that are coming into the market. Most of them are unconventional shale supplies, which are quite expensive, being close to $80 – 85 a barrel. What I would add to those increased costs to unconventional supplies is the fact that we have got a lot of acreage in the U.S. that has been bought and sold. The price of that acreage has actually doubled, which all add to the cost base. Another thing is that there are high decline rates and a shortage of labour and rig supplies, which require a lot of investment to keep them running. Overall, we are on a quite high cost base for oil, because the incremental supplies that are coming are quite expensive to put into the market. It is not only shale supplies, we have got subsalt in Brazil, which is quite expensive, due to the technology, as well as Gulf of Mexico, where there are additional safety measures they have to put in, which  makes it a lot more expensive.

We expect prices to be very close to $111 a barrel, where they are currently, as the market is fairly balanced at the moment and there is no sign of shortage.