Market Review (July 21th to Aug 05th, 2012)
The crude oil witnessed plenty of bargain hunting as the prices tumbled under $87 per barrel levels before settling back at $91.41 per barrel amid eurozone debt worries and the strength in the US dollar. The key reasons for the situation are sanctions on Iran and decline in supply.
Crude oil prices have turned steady as US Fed Reserve gave no indications of a fresh stimulus to boost the economy. The ECB left the main refinancing rate unchanged and announced no bond purchase program. On the other hand Iran sanctions has led to global supplies of Iranian crude come down by a whopping 52% or 1.2 million barrels of oil a day. That accounts for a loss of about $133 million dollars on a daily basis and is close to $48 billion dent on annual budget of Iran; a revenue loss equivalent to 10% of its economy. Still, the absence of 52% of Iranian oil is not causing the crude oil prices to sky-rocket. In fact, Brent oil has dropped 4.2 percent to $105.97 a barrel since Jan. 23 because of broad reasons slackening of growth in the global economy and enhanced production by Saudi Arabia.
Moreover the US decided to tighten the economic sanctions on Iran, betting that additional pressure will force Iranian officials to accept to curb their nuclear activities. The White House imposed new penalties on two foreign banks in China and Iraq. The market sentiment is uncertain now as investors remain worried over the euro’s outlook as the ECB stood aside last week doing nothing but to criticize the expensive borrowing costs on debt-laden nations raising up possibilities that the bank may join the region's emergency funds to reduce these high borrowing costs.
From demand supply end, the US Energy Information Administration (EIA) reported a 6.5 million barrel drop in domestic crude oil inventories in the fortnight, the largest weekly drawdown since December. The total inventories were reported at 373.58 million barrels compared to 380.10 million barrels a week before. National Hurricane Center has issued advisory for tropical cyclone formation that can further spurt the prices of crude oil.
Strength in oil prices is helped by the US and its allies sanctions on Iran’s oil exports. In coming months, the situation will likely be tighter as the US intensified sanctions by penalizing foreign banks that handle transactions for National Iranian Oil Company (NIOC) or its subsidiary Naftiran Intertrade Company. Moreover, the US placed sanctions on China’s Bank of Kunlun and Iraq’s Elaf Islamic Bank. Also, the situation in the Middle East getting worse raising up worries and concerns over the region’s oil supplies which contributes around 30% of the world's oil supplies. This means that oil disruption from there will push up crude prices up as supplies might not be enough to meet the current demands.