Four events that may lead to lower oil prices in 2012

CGES ANALYSTS | JANUARY 2012 | SOURCE: Monthly Oil Report

As ever, we must take into account the likelihood that oil prices will drop below the levels predicted for 2012.

Four considerations that may lead to lower oil prices in 2012:

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1.    Greece default on Eurozone debt

The most likely scenario that would significantly lower oil prices is an escalation of the Eurozone debt crisis to the point of a Greek default and a major credit crunch for Europe’s banking sector, which will drag the whole of Europe into recession, reducing global demand by 400,000 bpd.

Reinforcing weaker European demand growth is the expectation of a further depreciation of the Euro against the US dollar.

2.    Saudi Arabia raise production to replace Iranian supplies

Secondly, Saudi Arabia may be unwilling to curb its production as Europe turns to Riyadh to replace embargoed Iranian supplies.

Tehran itself has warned Saudi Arabia and other OPEC members not to boost their oil production in order to offset the impact of any sanctions against the regime.

3.    Libya’s oil production escalates

Thirdly, a faster revival in Libya’s oil production has a high probability of materialising, although its volume effect will be only around 300,000 bpd.

Libya began the first steps towards recovery in September last year, averaging 90,000 bpd for the month as a whole. Libyan sources continue to support the suggestion that pre-revolution oil production capacity of around 1.8 mbpd could be restored within a year.

4.    Chinese oil consumption lowers

Finally, a Chinese hard landing cannot be discounted, since a sudden drop in its economic growth rate may occur as a result of local banking sector problems and/or a bursting of China’s worrying property sector bubble. This would lower Chinese incremental oil consumption by 150,000 bpd.

On the basis of all of the above, there is a 1 in 33 likelihood that oil prices will be lower in 2012. This suggests that oil markets will remain volatile during 2012, marked by occasional oil price spikes.

Related article: Three oil price scenarios for 2012

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