Oil prices hit a three-month high on expectations of increased demand as refineries return from maintenance, coupled with supply concerns because of production shortfalls.
While the focus in the crude markets has been on the US, with the WTI rallying almost 16 per cent over the past three weeks, Brent, the international benchmark, has been gaining ground over the past month on the tighter supply and demand situation.
ICE August Brent rose as high as $109.72 a barrel on Tuesday, up 63 cents on the day and more than 10 per cent from the recent low on June 24. The benchmark was later trading up 18 cents at $109.27 a barrel, while Nymex August West Texas Intermediate was 16 cents lower at $106.14 a barrel.
Both Brent and WTI have benefited from the relief surrounding the probable timing of the US Federal Reserve’s tapering of its quantitative easing programme. Many analysts and economists believe that the slowing of asset buying by the Fed will come towards the end of the year rather than in September, said Harry Tchilinguirian at BNP Paribas in London.
The Brent benchmark has also been supported by a tight physical market. Goldman Sachs said the recent rise in Brent was “the result of Opec production shortfalls in June 2013, exacerbated by growing geopolitical risks on the back of the recent developments in Egypt”.
Pointing to the latest supply data in the International Energy Agency’s monthly report, Goldman noted that Opec output in June fell 370,000 barrels a day from the month before as supply from Iraq, Nigeria and Libya declined, while the ramp-up of production from Saudi Arabia was not enough to compensate for the loss.
The recent fall in Opec production has come at a time when demand generally picks up, with refineries coming back from maintenance. New refineries in Asia have also added to crude demand.
Analysts said risks stemmed from Opec output failing to recover, and Saudi Arabia being forced to ramp up production to make up for the shortfall in the third quarter. With Saudi already producing 9.7m b/d – only slightly below last year’s peak of 10.1m b/d – there will be little spare production capacity left, they said.
Goldman said: “While we maintain our Brent price forecast of $105 per barrel for the second half of 2013, we believe the risks have shifted more to the upside over the short term due to the possibility of continuing Opec production shortfalls and increased geopolitical risks.”