Commodities | Aug 21 2006
By Greg Peel
Over the last fortnight, the price of WTI crude has drifted down from above US$78/bbl to under US$72/bbl. But don’t be fooled.
Both Danske Bank and Barclays Capital put out reports on Friday noting fundamental support for a weaker oil price in the immediate future. For one thing, the built in premium due to Israel’s war with Hezbollah has now eroded.
Furthermore, the BP Alaskan pipeline shutdown scare has been tempered to a significant degree. Early forecasts were for an extensive and complete shutdown, but it now appears BP will lose only around 50% capacity. The summer driving season is winding down in the US, which traditionally is the peak demand season. Despite a couple of scary moments, no hurricanes have as yet formed in the Gulf of Mexico. US oil seems in relatively abundant supply.
To top this all off, belief in an ongoing economic slowdown in the US also points to lower oil prices, and China appears to now be getting somewhere with its own measures to reign in the economy.
All this should point to a significant pullback in oil prices – but that will not be the case, warns both Danske and Barclays.
Tomorrow marks the deadline for Iran to respond to the incentive package offered for it to cease developing its nuclear capacity. If it dismisses the package it will face UN economic sanctions. It is highly likely Iran will dismiss the package, and then potentially respond to any sanctions by blocking oil supply. The threat to do so would see oil rushing back up through US$80/bbl.
An actual supply cut-off would see oil above US$100/bbl but were Iran to go one step further, and blockade the Strait of Hormuz in the Persian Gulf, it would also be shutting down Saudi Arabia’s oil supply. David Wyss, chief economist with Standard & Poors, has suggested were this to occur oil could go to US$250/bbl.