Oil prices have been on an upward path since the beginning of February supported by bullish and better-than-expected US economic performance where the government announced three per cent annual economic growth in the fourth quarter of 2011.

The market was also supported by positive manufacturing data out of China, and the recent agreement in the EU to bail out Greece and to agree on a new financial pact and a major fund to avoid future crisis.

But the good news stops here as oil demand in 2012 is increasingly revised downwards by all forecasters. In its February Oil Market Report the International Energy Agency (IEA) revised demand to 89.9 million barrels a day (bpd), down by 300,000 bpd from a month earlier report. The call on Opec oil in 2012 is now forecast by the IEA to be only 29.9 milion bpd, down from 30 in 2011.

In the US, demand for gasoline over the four weeks ended February 24 was 6.7 per cent lower than a year earlier and US oil imports for 2011 are one mbd lower compared with 2010 due to increasing production from shale oil and reduced demand.

Even world economic growth has been revised down to 3.4 per cent in 2012 from four per cent due to uncertainties about economic growth in the EU and credit downgrades to some key European countries where growth is expected at minus 0.2 per cent from plus 0.2 per cent previously.

On the production side, losses from Syria, Yemen, Sudan and the North Sea are balanced by the faster than expected recovery of Libyan production and sanctions on Iran have not yet physically impacted the supply. Iran's January production is reported to be 3.45 million bpd compared with 3.55 million in November 2011. Sanctions on Iran have not been actually implemented due to the grace period of US sanctions on Central Bank dealings and the EU embargo which will only come into effect in June.

Some analysts are suggesting the sanctions on Iran will not affect the flow of oil to the market. Industrial countries may reduce or phase out their imports completely while China, India and other developing countries may be encouraged to buy Iranian oil but at a substantial discount. This is supposed to intensify Iran's financial problems without making the price of oil rise to unacceptable limits.

This has been outlined in a report on the Oil Market Impact of Sanctions against the Central Bank of Iran which has been circulated widely in Washington and European capitals by some sanctions advocates where they state, "It's possible to reduce Iranian oil revenue without reducing Iranian oil supply." It remains to be seen how this game will be played.

Given the above the question it must be asked why are oil prices going up and why are they at this level?

There is no question regional tensions in the Middle East are increasing and while they have not affected oil supply too much, they could. The situation in Syria is very serious and in Yemen things are not improving and in Sudan events have taken a violent course lately. Even in Libya, the spectre of fragmentation of the country is raising alarm and the expected growth in Iraq production is yet to come.

Fear factor

More importantly the threats and counter-threats between the West and Iran are increasing the fear factor. The market remains jittery and the slightest news sends prices soaring. This is demonstrated by the false report spread by an Iranian news television of a pipeline explosion caused by sabotage in Saudi Arabia last Thursday.

Prices soared by about $4 (Dh14) a barrel as Brent oil posted $128 a barrel only to fall by the same amount the following day when Saudi officials denied the incident, which was in any case uncorroborated by other sources. The false report to my mind is almost intentional and is a statement of intent. Iran has often said it will disrupt other countries' production if its own is threatened.

 

The writer is former head of Energy Studies Department at the Opec Secretariat in Vienna.