© Nick Trevethan
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Nick Trevethan
Senior Commodities Strategist at ANZ Research, Singapore
The geopolitical tension between the West and Iran poses a risk to oil prices as the West pushed to discourage Iran's nuclear activity with an embargo on Iran's oil. At the moment it looks like there is a small chance of anything dramatic happening. However, if anything should develop, in particular an Iranian blockade of the Straits of Hormuz through which more than a third of the world's oil is shipped, the consequences for the market will be severe.
The European Union has recently announced that not only will restrictions apply to crude oil imports into Europe, but they will also prevent European entities selling Iranian crude to non European countries. The Europe will not be able to buy crude oil from Iran and sell to China or India, for instance, and will have to be completely out of the trade.
If we take Brent oil separately, the thing with Brent is that the supply is very small. Our forecast for the Brent prices, provided there is not an eruption in the Middle East, is the following: $112 in Q1, $114 in Q2, $116 in Q3 and $119 in Q4. An expected rise of Brent this year is around $7.
Our forecast for the WTI crude oil is slightly steeper: $103 in Q1, $105.5 in Q2, $108 in Q3 and $113 in Q4. A forecast rise in the year 2012 for WTI is about $10.
One of the reasons for higher prices on WTI crude is the fact that we see more Libyan oil returning to the market which should erode some of the premium which developed from the second quarter of the last year during Arab spring. Also it is important that the Libyan oil that is coming back to the market is light sweet crude which is comparable to Brent oil.
Another reason for higher WTI prices would be the reversal of the US pipeline that runs from Cushing, a huge trading hub for crude oil in Oklahoma, to the Gulf coast. The pipeline reversal has been delayed a little bit, but in theory it should alleviate some of the excess oil supply in Cushing Oklahoma which is where WTI is priced and should mean that its prices will appreciate more rapidly than Brent.