Oil Market Update – June 2014

The relative price stability that characterised Brent and Tapis in the first half of 2014 has been shaken of late by unexpectedly severe sectarian turmoil in Iraq. After Mosul fell on 10 June, Brent jumped 4% in a week and broke through $115 per barrel by 19 June.

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  • The relative price stability that characterised Brent and Tapis in the first half of 2014 has been shaken of late by unexpectedly severe sectarian turmoil in Iraq. After Mosul fell on 10 June, Brent jumped 4% in a week and broke through $115 per barrel by 19 June. While the deterioration in the security situation in OPEC’s second largest producer is yet to dent Iraqi oil exports with and prices moderating somewhat in late June, the spectre of further unrest will likely weigh on the minds of investors.
  • The US benchmark West Texas Intermediate (WTI) has continued to climb relative to Brent since the opening of the southern section of the Keystone XL pipeline in January 2014. The project increased the takeaway capacity from Cushing, Oklahoma to refineries on the Texas coast, reducing the bottleneck which had suppressed WTI.
  • US production continues to grow rapidly on the back of increased exploitation of shale oil reserves, with production up 15% and imports down 7% year on year to March 2014. US production has now grown 57% over 5 years. Should this trend continue, there will likely be further pressure to relax US export restrictions, although the impact on global dynamics is likely to be small.
  • On balance, the fundamentals point to stable to moderately declining prices over the next six months, with the US Energy Information Administration (EIA) projecting that supply growth will exceed demand growth. However, a disruption to Iraqi oil exports could see prices rise.
  • We project that domestic petrol prices will fall slightly to 149 c/litre in the June quarter and 148 c/litre but will rise from the December quarter and throughout 2015.

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