Societe Generale Raises Brent View as OECD Stockpiles Drop to Lows

Societe Generale raised its 2012 forecast for Brent crude to $127 a barrel from $110 prior, citing lower global stockpiles and tighter OPEC spare capacity.


Supply side issues will drive oil markets for the remainder of 2012, wrote Michael Wittner, head of oil market research at Societe Generale in New York, particularly "very tight crude oil stocks, very low OPEC spare capacity, and significant non-OPEC supply disruptions. In addition, both actual and potential supply disruptions from Iran will be an important factor for the markets."

Crude oil stocks are "very tight," at 5-year lows in the OECD as of the end of February, Wittner noted. OPEC spare capacity is also very low, only 1.9 million barrels a day in February, of which 1.6 million was in Saudi Arabia, he said. "There are also ongoing significant non-OPEC supply disruptions, with output in South Sudan, Syria, and Yemen currently down by a combined daily 600,000 barrels."

U.S. and European sanctions banning the import of Iranian crude, effective July 1, will cut the country's output and exports. This theme will emerge as "the more important fundamental driver," Wittner said. Though Saudi Arabia will increase production and exports to fill the Iranian shortfall estimated as high as 800,000 barrels a day, this will result in OPEC and Saudi spare capacity tightening further, by the same amount."

Societe Generale warned prices could spike to as high as $200 in the event of what it termed "low-probability but high-impact Iran-related scenarios," such as military action against Iran by Israel or the U.S., or an Iranian shutdown of the Straits of Hormuz

"These scenarios present extreme upside risk, which would see Brent spiking into the $150-200 range," wrote Michael Wittner, head of oil market research at Societe Generale in New York.

"In the other direction, the negative impact of high oil prices on the global economy" increases the 'oil burden' and presents downside risk to the outlook. "The sale/release of strategic reserves by IEA countries also presents downside risk."