Wednesday, February 8, 2012

Upside risks to crude oil prices

Other than the geopolitical concerns pushing up crude oil prices (in particular Brent crude), we may be seeing much tighter supply conditions going forward. OPEC spare capacity is approaching tight levels not seen since 2008 when crude prices were approaching the $150/b levels.

OPEC spare capacity and global oil demand (source: Barclays Capital)

The non-OPEC production has been on the decline in the UK, Norway, and China. Major forecasts for the 2012 supply growth are all materially lower than they were in 2011. With spare capacity tight, any slight disruption or a possibility of a disruption could push Brent prices higher, widening the Brent-WTI spread. The risks in crude oil in general are now to the upside.
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