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Crude oil prices face further downward pressure

Crude oil prices, which rose steadily from July 11 only to come off a seven-week high yesterday, will continue to see downside risks for the remainder of the year as a global economic slowdown impacts demand.

However, analysts said a combination of oil supply constraints due to sanctions against Iran as well as other geopolitical concerns and further accommodation by the US Federal Reserve could see short-term spikes in oil prices.

Nymex traded at US$89.13 per barrel at 5pm while Brent was trading at US$103.85. The year's closing high for Nymex was US$110.73 on Feb 24 while that for Brent's was US$123.44 on March 13.

Phillip Futures Pte Ltd analyst Ker Chung Yang told StarBiz that oil prices were expected to consolidate at current levels but could spiral down on further weakness in economic data or spread of the eurozone debt crisis.

He said geopolitical concerns remained on the radar screen as the whole world relied more on Saudi Arabia's production (the highest in a decade) as Iran produced less.

“Bear in mind that oil supply is inelastic in the short run. Hence, we see the upside risks to an oil price spike in the short term remaining largely intact. If anything were to happen to Saudi production, we expect the oil market to be distorted severely,” Ker said.

Oversea-Chinese Banking Corp Ltd analyst Barnabas Gan said in a report dated July 17 that investors would be more concerned about the global slowdown than supply constraints.

“The example seen from the falling oil prices despite the EU embargo against Iran illustrates that worries over the deepening eurozone debt crisis and global slowdown take precedence over short-term supply constraints,” he said.

Gan said leading indicators were showing slowing oil demand for the rest of the year with the Organisation for Economic Cooperation and Development leading indicator (which generally leads oil prices and demand by one month) pointing towards a period of slowing oil demand for months ahead.

“Importantly, the outlook for the rest of the year, seen from total motor vehicle registration across the G7 which generally leads oil prices by seven months also points towards a slowing oil demand for the rest of the year,” he added.

Gan has a third and fourth quarter forecast of US$83 and US$81 respectively for Nymex and US$95 and US$91 respectively for Brent.

Analysts at Phillip Futures said in a report dated July 10 that energy markets were heading for a bumpy ride in the second half.

“We have lowered our oil price forecast to reflect the pessimism on macro outlook as well as the looser fundamental oil balance. We forecast Brent will average roughly US$107 this year while Nymex will average roughly US$94,” they said.

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