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Latest Oil Price Outlook from Standard Bank
The oil minister of Saudi Arabia, Ali Al-Naimi, stated for the first time in a TV interview yesterday that the kingdom wants to keep the oil price at the $100/bbl level, substantially above the $75/bbl level, which was indicated by the kingdom as a "fair price" back in 2008. The raised expectation by Saudi was not surprising after a jump in public spending amid the unrest in the Middle East and North Africa region last year. In fact, the IMF estimated that Saudi needs at least $80/bbl to balance its budget, while Iran, Iraq and the UAE need an oil price somewhere between $80 and $100. We believe that the new target from Saudi will again be largely ignored by the market in the event of shocks. The two biggest risks to the oil market at the moment is: firstly, the risk of severe supply disruption from Iran; and secondly, a sharp slowdown in the global economy, in particularly China and the Eurozone. Both could drive oil prices significantly away from the price targeted by Saudi. In addition, the kingdom is also more receptive to a gradual price rise from their targeted level as experienced during 2009 and 2010. That said, Saudi has been increasing oil production during H2:11, absent of agreement among OPEC members on their June 2011 meeting. It's fair to say that oil prices would have been much higher during H2:11 without production increase from Saudi. While Saudi is unlikely to be able to prevent huge price volatility in the event of shocks, the country maintains significant influence over the oil market. On balance, the latest stance from Saudi set up a case for a price range between $100/bbl and $120/bbl for 2012, using Brent as the benchmark, absent of major supply shocks or fears over demand collapse.
(published on 01/18/12)