Brent futures fell to levels last seen in the fourth quarter of 2011 as investors and speculators sold off oil contracts, spurred by uncertainty that governments may fail in preventing a systemic financial crisis in Europe, David Greely, head of energy research at Goldman Sachs, in New York said in a report dated yesterday. Crude could recover “rapidly” if countries act to stave off concerns and boost economic growth, he said.
The bank reiterated its recommendation to buy West Texas Intermediate crude futures for September delivery, according to the report. The strategy, first made on Feb. 22, has so far generated a loss of $22.72 a barrel, it said.
“The recent oil price action highlights the increasingly large role that policy risk is playing in the world oil market,” Greely said. “As the uncertainty surrounding the policy response to the latest phase of the EU debt crisis and the softening economic data in the United States and China is lifted, we believe that a long WTI position will offer a compelling opportunity.”
The pending European Union oil embargo on Iran is another area where government policy will affect the crude market by tightening the amount of supply available, Goldman said. The sanctions are set to go into effect on July 1.
The bank forecasts in a worst-case scenario that Iranian exports drop to 1.1 million barrels a day, about 1.3 million barrels less than in 2011, according to the note. Its baseline view is calling for a daily decline to 1.6 million barrels.
“As the impact of U.S. and European sanctions come to bear on Iran, the loss of Iranian crude oil has returned the oil market to balanced,” according to Goldman. “We expect that the oil market will soon shift into a seasonally adjusted deficit in the second half of 2012 as demand picks up seasonally.”
High fuel prices may put pressure on governments to release emergency stockpiles of crude, Greely said. While Brent prices have fallen more than 20 percent from their highest levels this year, the cost of gasoline at the pump has only declined 8 percent. U.S. motor fuel supplies are almost at the lowest since 2007 while distillate inventories are the smallest in five years, according to the report.
“U.S. product inventories consequently present a strong contrast to U.S. crude oil inventories, which are near all-time highs,” Greely said. “The ability of an SPR release to cause a meaningful response in fuel prices would therefore require a strong increase in refinery runs.”
Brent futures fell 3.4 percent to settle at $98.43 a barrel on June 1, the lowest close since Jan. 27, 2011 on the London- based ICE Futures Europe exchange. Prices rose today as much as 54 cents, or 0.5 percent, to $101.18 a barrel.
West Texas Intermediate crude rose as much as 73 cents, or 0.9 percent, to $85.75 a barrel in electronic trading on the New York Mercantile Exchange. It was at $85.43 at 11:03 a.m. Singapore. Prices are 14 percent lower this year.
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