Global economic slowdown may still lead to oil price rise – report

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wafra oil field
Giant boilers convert water to steam at the Wafra oilfield along the Saudi Arabia-Kuwait border.

Global economic slowdown and a negative outlook towards major world economies will lead to a decline in demand for oil but prices might still increase, a report published by a Kuwaiti institution said.

The study added that despite current turbulences, prices are expected to witness improvement in Q3 of this year as a result of an increase in demand in some areas. The report, compiled by Kuwait Finance House research division, noted that oil traded near the lowest level in a week and dropped back to below $90.00 per barrel as concerns heightened on the back of weakening fuel demand and deepening eurozone debt crisis. Prices are down 11% year-to-date.

On the credit rating front, the report insisted that selling may continue this week as Moody’s Investors Service on late Monday revised to ‘negative’ from ‘stable’ outlook on the Aaa sovereign ratings of Germany, the Netherlands, and Luxembourg. Nevertheless, the negative outlook does not necessarily indicate an imminent downgrade, it added.

Moody’s also cited the huge potential costs of a euro breakup as risk of a Greek exit from the euro area persist. It also mentioned the material risk of Greece exit from the eurozone which will expose core countries such as Germany to a risk of shock that is not commensurate with a stable outlook.

The Kuwaiti study said that oil prices could be higher than projected if recoveries from the disruptions are slower than forecast and if more unexpected disruptions occur, as this may lead to lower than expected oil supply.

The EU sanctions, including an embargo on Iranian crude and an insurance ban on tankers carrying Iranian oil, became fully effective on 1 July, shortly after the latest set of US sanctions entered into force. According to the IEA, the US has issued exceptions to all major importers of Iranian oil from sanctions that could have been imposed on foreign financial institutions which facilitated oil-related transactions with the Central Bank of Iran, but only after they had demonstrated or pledged significant reductions in their purchases of Iranian crude oil.

The report also touched on fluctuation of global economic recovery. “The global recovery is faltering and the worsening eurozone debt crisis has eroded demand for fuels. The deteriorating economic situation in the eurozone would pose a downside risk to global oil demand and prices,” it said.

Recently, the International Monetary Fund (IMF) slashed its global growth projections to 3.5% in 2012 and 3.9% in 2013, from its earlier projections of 3.6% and 4.1%, respectively in the April 2012 World Economic Outlook (WEO), the findings noted. “However, market’s positive reaction to recent EU negotiations indicates oil prices may fluctuate in both directions as perceptions about the likelihood of a deeper crisis evolve. For 2012, oil consumption in Europe is expected to fall by 0.3 million bpd from last year’s level and by a further 0.4 million bpd in 2013,” the report explained.

“Despite the volatility in oil prices, we remain positive on the oil and gas sector. Oil demand is expected to reach its seasonal peak in 3Q12, reflecting both the US driving season and increased oil use for electricity generation in the Middle East.

“Following rising uncertainties in the global economy, we project that world oil demand will reduce in the second half of this year. Meanwhile, total global oil supply is expected to increase to 89.1 million bpd in 2012, 0.9 million bpd higher than the previous year. However, the forecast continues to be associated with a high degree of risk, such as political tensions, technical and weather-related issues, as well as maintenance,” the Kuwait Finance House report concluded.

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