Since the end of June, oil prices have been steadily climbing, regaining much of the ground lost during a plunge in the second quarter. Brent crude futures are now around US$115/b, more than US$23/b higher than at the end of June.
On the demand side, oil market indicators look bearish. Global economic performance is hampered by a stagnant euro zone, a struggling US economy, and signs of a slowdown in China. Meanwhile, Saudi Arabia is pumping oil at record levels, while Iraq and Libya have made significant production gains this year. What gives?
One explanation is ongoing tension between Iran and the West. The harshest US and EU sanctions on Iran’s oil exports took effect in July, and these exports have plummeted by around 1m b/d from 2011 levels. Speculation is mounting about a possible Israeli strike on Iran’s nuclear facilities, while Iran is threatening to block the Strait of Hormuz. All of this sabre-rattling makes oil markets nervous. A modest acceleration in demand in the second half of the year after a lacklustre first half will also support prices somewhat.
So, although the daily headlines focus on poor growth prospects in many developed economies, the news from the oil market is about sharply higher prices. The futures market implies some softening in the coming months, while the Economist Intelligence Unit expects a more pronounced fall in prices. Still, Brent crude should fetch more than US$100/b for the foreseeable future, an unwelcome trend given the sluggish global economy.
The EIU's Energy Briefing provides forecasts to 2020 and daily news analysis for the world's most important energy markets, along with a database developed in association with the International Energy Agency.