Focus on Brent As Sentiment Deteriorates


Our analysis on the factors that will put downward pressures on oil prices - especially Brent - ha s played out w ell over the past four weeks. W e have seen the market consensus move closer to our forecast for a Brent average of US$106/bbl in 2013 . We maintain this forecast, note risks are to the downside and expect that the second half of the year will see lower average oil prices (excluding WTI) than the first half.

The first half of 2013 closes with Brent having averag ed US$108/bbl, WTI at US$94.2/bbl, and OPEC at US$105.2/bbl.

Analyst Consensus Converges To Our Forecast
Spot - 25/06/2013 2013f 2014f 2015f 2016f
*BMI is part of the BBG Consensus surveys. f=forecast. Source: Bloomberg, BMI
WTI - BBG Consensus* 95.8 95 99.5 102.5 95
Brent - BBG Consensus 101.8 108 108 110 101.5
Brent / WTI Spread - BBG Consensus 6.0 13.0 8.5 7.5 6.5
WTI - BMI Forecast 94.5 96.0 97.0 96.0
Brent - BMI Forecast 106.0 103.0 102.0 101.0
Brent / WTI Spread - BMI 11.5 7.0 5.0 5.0

Since April 2013 Brent has been trading within a range of US$100-105/bbl, and our forecasts anticipate that it will remain range-bound (and most likely towards the lower end of that range) for the second half of the year. Chinese growth worries and an appreciation of the US dollar have been the main factors behind the fall in oil prices. With the Iranian election behind us and the result judged to be one that will not provoke any imminent flare-ups, we do not see major geopolitical risks threatening Brent supply.

Looking at the fundamentals, the market remains well supplied, notwithstanding unease in the relations between Sudan and South Sudan and disruptions to Libyan supply.

Range-bound
Front-Month Brent Crude, US$/bbl (Daily)

On the contrary, we believe that the risks to the price of Brent are to the downside. A combination of more hawkish rhetoric by the US Federal Reserve (Fed) and weaker Chinese growth numbers has undermined emerging market asset and commodity price performance in recent weeks. These headwinds will continue, as BMI's China Country Risk analysts expect a sharp contraction in Chinese H2 2013 growth. We have long held that the bounce in Chinese economic activity in Q412-Q113 would be temporary and be followed by a slowdown that exposes systemic imbalances in the economy (see 'Growth Relapse Arrives On Cue', 10 June 2013).

The wider commodities complex is also showing a very weak performance, with copper and gold particularly in focus (see 'Monthly Metals Strategy', 24 June). A steady move by the US Fed towards tapering monetary stimulus has created an environment of dollar strength that we expect will persist for several quarters. US dollar strength will be a net negative for commodities, including oil. BMI's Commodities analysts view the break through the US$6,800/tonne level for copper as a key bearish break. The volatility in the gold price as ETF holdings liquidate massive positions is also expected to continue as the easy monetary conditions are reigned back dragging the price lower.

Holding Support...For Now
Front-Month Brent Crude, US$/bbl (Daily)

The technical picture for Brent shows quite strong support at US$98-100/bbl. While prices dipped below US$100/bbl in April, they rebounded above this key psychological support level within days, suggesting that the sentiment in the market is not (yet) supportive of much lower prices. This can change rapidly though if the price breaks below US$98/bbl long-term support. Weaker than expected Chinese economic performance will galvanise negative sentiment and so any break below support would prompt a downward revision in our forecast.

This article is tagged to:
Sector: Oil & Gas
Geography: Global