Prices of Brent crude have been cooling since April this year, as geo-political risk premium eased. The risk premium for Brent, which started rising last year with the onset of the Arab Spring, stayed high in 2012 on fears of military escalation against Iran. Crude oil continued to trade above the $100/barrel-mark as sanctions against Iran continued to loom. Brent started shedding some of the risk premium as chances of a military action against Iran started waning.
Brent crude started its downward journey from April this year and fell 3.34 per cent to close the month at $119.67/barrel. In May, it fell 14.70 per cent as fears of a meltdown in the Euro zone emerged yet again. But having touched a low of $95/barrel in June, analysts now believe crude oil will consolidate at these levels. A majority of analysts expect it to average at $100/barrel in 2012.
In the face of falling prices, some members of the Organization of the Petroleum Exporting Countries (Opec) had asked for a production cut. However, concerns over slowing global growth have ruled out any such move. The 12-member group on June 14 agreed to leave output at current levels (30 million barrels per day) for the second half of this year. Opec has been pumping oil above this level to prevent any major spike in prices in the event of sanctions against Iran. According to the Paris-based International Energy Agency, Opec pumped 31.86 million barrels a day last month, well below the daily demand.
Most of the members believe $100/barrel is a good price. Consequently, analysts are betting that oil will remain at these levels for the next six months or so, as the panic over a potential sovereign debt crisis has not abated. In a report titled, Petroleum Politics and Economics, Paul Horsnell and Amrita Sen of Barclays say: “A halt in the slide in prices is one thing, but the conditions for a sustained push-back to $110 and above appear harder and are certainly not met yet. While the market may feel it has now priced on the deterioration in the economic outlook, there are clearly still some downside risks, and there is the possibility or even probability of some very predictable headlines out of Greece in coming weeks."
