Continued from Part One.
On the other side of The Iranian Factor, acting as a counterbalance to the bulls, is the drag on demand caused by three factors:
Firstly, Europe (which is in parts either in recession or facing faltering growth, depending on what figures you look at), secondly, US consumption (that is already seeing the impact of oil prices on consumer demand for gasoline as prices approach $4 per gallon) and thirdly, slowing Asian demand, as China in particular experiences what most expect will be a soft landing, but is already hitting demand for distillates.
Indeed, it is the slowing Asian demand and the distillates markets that best underline the demand side of this equation.
A Reuters report states Asian gas oil crack spreads have also been weakening, albeit from relatively strong levels, suggesting refiners are starting to have problems passing on rising crude oil costs to consumers. The softening of crack spreads is all the more remarkable given the closure of no fewer than six Atlantic-basin oil refineries in recent months, the report says.
The balance of these two price drivers may be the estimation in the minds of the International Energy Agency (IEA) in not recommending the release of crude and products from government-controlled stock-piles. Arguably, we faced a similar situation to the Libyan crisis when in July last year, 60 million barrels of crude and products were released to ease supply and dampen price rises, but although there has been discussion of it, so far there’s little indication any action will be taken.
Some commentators are therefore beginning to suggest the upside risks have been given rather too much prominence, and if outright military confrontation can be avoided, we could well see a sharp correction in oil prices by the second quarter — if, as expected, the realities of falling demand take greater weight than the perceived threat to what is still quite plentiful supply.