Global oil market facing wide volatility this year - analyst

31 January 2012 18:55  [Source: ICIS news]

WASHINGTON (ICIS)--The global oil market is facing wide volatility this year, with potential disruptions that could drive crude prices to new heights and possible economic downturns that could plunge oil to $50/bbl, a leading energy analyst told Congress on Tuesday.

James Burkhard, managing director of Cambridge Energy Research Associates (CERA), told the Senate Committee on Energy and Natural Resources that the global oil market faces potentially broad price swings in 2012 “because of the wide spectrum of potential outcomes”.

“Limited spare capacity, geopolitical concerns and the risk of disrupted supply point toward the possibility of higher prices and even a severe price spike,” Burkhard told the panel.

In a hearing called to consider US and global energy outlooks for 2012, Burkhard said that chief among the risks for higher crude prices is the potentially catastrophic outcome of the Iran nuclear programme and western efforts to curtail it.

“The combination of tighter US and European financial sanctions, the European oil embargo on purchases of Iranian oil, political infighting in Iran, and Iran’s growing fear of encirclement creates a volatile atmosphere in which miscalculations could lead to grave consequences,” Burkhard said.

A recent analysis of oil pricing consequences if Iran were to take action to close the Strait of Hormuz suggests that crude could surge to more than $350/bbl.

Burkhard said that the decade-long nuclear standoff with Iran “has become a constant feature of the oil market, with anxiety fluctuating in response to Iran’s volatile posture toward negotiations”.

Burkhard noted that a recent Iranian official’s threat “to close the Strait of Hormuz – the most important oil export route in the world – sent a shudder through oil markets”.

On the other side of the volatility spectrum, he said, “the global economy is in a fragile state ... the eurozone crisis remains unsettled and could worsen. The pace of growth in India and China has also showed signs of slowing down [and] unemployment is still high in the United States”.

He said that if a member country exits the eurozone, the US is unable to address its fiscal problems, and growth weakens further in emerging markets, “the outcome is another global recession, followed by several years of below-trend growth”.

In that scenario, he said, “oil prices fall below $50/bbl”.

“We do not believe the world has entered such a scenario,” Burkhard said, “but it cannot be ruled out for 2012 given the concerns emanating from the eurozone.”

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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