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Crude prices track debt-contagion fears

Oil prices tracked global debt-contagion fears throughout October, as weak US economic data and lowered demand forecasts helped to depress prices

Yet despite concerns of a double-dip recession, Brent was trading at over $110/b on 24 October on optimism that a meeting of Europe’s financial leaders would solve the Eurozone debt crisis, providing a vital boost to financial stability. Greece has warned it will run out of money this month and there are doubts that the EU will commit to another Greek bailout.

The International Energy Agency (IEA) cut its global oil demand forecast by 50,000 b/d for 2011 and by 210,000 b/d for 2012. It blamed disappointing economic data, predicting weaker demand in markets such as the Middle East, the US and even China. IEA demand forecasts stand at 89.2m b/d in 2011 and 90.5m b/d in 2012. The figures were revised on lower-than-expected third-quarter non-OECD financial data and a fall in global GDP growth estimates, with significant downside risks.

Earlier in October, Opec also revised down its demand predictions for this year – by 100,000 b/d, to 87.81m b/d – and next – by 70,000 b/d, to 89.01m b/d. In response, Brent dipped below $100/b for the first time since August. WTI also dropped, to $84/b, on fears that Europe’s debt crisis would trigger another global recession and slash world energy demand.

The price disparity between Brent and WTI – trading at over $88/b on 24 October – is likely to continue, says Merrill Lynch. The investment bank expects Brent’s premium to remain at least $12/b until new pipeline capacity comes on stream in the US Midwest, in late 2013.

The death of Libya’s ousted leader, Muammar Qadhafi, and the National Transitional Council’s declaration that the country has been liberated could bring some stability to crude prices. If reports that output could reach more than 1 million b/d by the end of the year prove realistic, there could be a softening of crude prices and an end to the volatility experienced of recent months.

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