8% drop in oil price so far this week caps ugly few months

Brent crude oil prices have had a rough time of late. Now trading at just under $90 a barrel, it is down from around $124 in late February and is close to its 52 week low. It peaked at just over $128 in 2008.

A combination of worries about global growth, mitigation of supply worries, liquidation of positions by traders suffering losses elsewhere, increase in production and a strengthening of the US dollar have all helped drive down the price of Brent this year.

The question is where are prices going in coming months? Economic news don’t look likely to be the saviour any time soon. The nuclear development issue overhanging Iran continues in the background but has so far failed to blow up into a major international event. Whether Israel follows through and intervenes directly to curtail Iran’s nuclear ambitions is uncertain and certainly highly politically dangerous. A full scale military event in the Middle East would certainly reverse oil prices sharply. 

The big issue is that production growth is outstripping demand. The U.S. Energy Information Administration cut its 2012 world oil demand growth forecast by 150,000 barrels per day to 810,000 barrels per day in mid June. It also increased its forecast for non-OPEC production growth in 2012 by 120,000 bpd to 800,000 bpd, taking total non-OPEC output to 52.72 million bpd.

The largest area of non OPEC production growth is the USA and Canada as shale oil and tight oil as well as oil sand production ramps up as a result of advances in non conventional oil technology. Production will increase in North America by around 890,000 bpd in 2012 and 470,000 bpd in 2013.

Contrarian Investor UK