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Written by Sumit Roy  |

December 29, 2011

Crude Oil Report: Will Brent Top $115 Or Fall Below $100?

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We discuss what variables will influence oil prices in 2012.

The Department of Energy reported this morning that in the week ending Dec. 23, U.S. crude oil inventories increased by 3.9 million barrels, gasoline inventories decreased by 0.7 million barrels, distillate inventories increased by 1.2 million barrels and total petroleum inventories increased by 3.1 million barrels.

Crude oil prices fell slightly after the latest figures were released, with Brent last trading at $106.93/bbl, while WTI traded at $98.76.

Price action in crude oil markets remains uninspiring, with Brent still locked in a range between $100 and $115. Until there is a clear break in either direction, the technical outlook for Brent is neutral.

On the fundamental side, there are conflicting signals. Libyan production is ramping up faster than expected; the new government says that output recently topped 1 mmbbl/d (output was 1.55 mmbbl/d before the civil war). Meanwhile, Saudi Arabia has maintained its production near record levels of 10 mmbbl/d.

That should help inventories — which are below the five-year average in both the United States and the OECD as a whole — recover to more healthy levels. Indeed, if U.S. inventories are any indication, the recovery is under way. As we show in our rundown of today’s EIA’s latest figures, total petroleum inventories have been rising counter-seasonally in recent weeks — last week’s large drawdown notwithstanding.

Then there is the always-present geopolitical wild card when it comes to the oil market. This year we saw the crisis in Libya reduce production by up to 1.55 mmbbl/d.

Next year, all eyes will be on Iran, as tensions between the country and the United States and its allies intensify. There are talks of potential sanctions on Iran’s oil exports. While having the obvious impact of reducing the country’s 2.4 mmbbl/d of oil exports, leaders there have suggested that it could also block any oil shipments through the Strait of Hormuz, where 15.5 million barrels of crude travel every day.

Finally, the evolution of the sovereign debt crisis in the eurozone bears close watching. A financial shock in that region will surely have significant ramifications for global oil demand.

Whether Brent ultimately tops $115 or falls below $100 remains to be seen, but the aforementioned factors will all play a key role in shaping the supply and demand balance.