Energy
Preference: neutral
Brent (24 Oct): USD 109/bbl (last month: USD 111/bbl) UBS View (crude oil) Brent 6-month target: USD 105-110/bbl ¢ Growing fear over an escalation of the Syrian civil war, involving Turkey, allowed crude oil prices to move higher again. While Syria's crude oil exports already dropped to near zero due to international sanctions, the oil market's concerns relate to the Kirkuk—Ceyhan oil pipeline (Iraq-Turkey — capacity of 0.4mbpd) and the crude exports from the Turkish port of Ceyhan, around 70km from the Syrian border. e Though we believe that Syria and Turkey are not interested in a military confrontation, a stop of crude oil flows from Iraq via Turkey would curb global incremental crude oil supply in 4Q12 by more than 50%. It would also tighten up the market balance in early 2013 and put additional pressure on the structurally low spare capacity in the crude oil market. e In the absence of a further escalation, which remains our base case, ebbing news related to Syria-Turkey is likely to ease supply concerns. This should keep the market focus on weak demand growth and strong crude oil output from North America, allowing the Brent price to temporarily reach USD 95/bbl. e A weaker USD, reduced economic tail risk for Europe, ongoing social turmoil in the Middle East and North Africa and the risk that the Iranian topic heats up again after the US presidential elections are likely to keep the Brent price around USD 105-110/oz in 6 months.
4 Positive scenario Brent 6-month target: USD 140-180/bbl
e Iranian oil exports are subject to a complete embargo, which would drain another 0.5-0.75 mbpd of global crude oil supply. Alternatively, a military confrontation that affects crude oil supply via the Strait of Hormuz would be the ultimate supply shock, requiring crude oil to be rationed on a large scale.
4 Negative scenario Brent 6-month target: USD 75-80/bbl ¢ Political tensions lead to a breakup of the Eurozone or intensify the economic contraction. At the same time, the Fed is not successful in promoting growth. Supply-wise, a restoration of Iranian exports and no supply cuts by OPEC would push oil inventories firmly up and weaken Brent prices towards USD 80/bbl.
What we're watching Why it matters
The biggest risk related to a potential military confrontation is an Israeli air strike on nuclear facilities in Iran. A preemptive strike could easily destabilize the region even further and threaten global crude oil supply.
Changes in the US gasoline blending mandate with ethanol (made from corn)
lran tensions
sue might fuel higher crude oil prices as spare capacity increases slides further. US crude oil supply progress (room to grow by 1.3 mbpd from 2011 to 2013) isa vital offsetting factor to supply outages seen in the MENA region.
Brepacndl Most of China's demand growth seems to be related to stock building (strategic
and by refineries). If this is true, the import should stay on the weak side y/y.
Oil market reports Key date: 13 Nov, IEA Oil market report
2 UBS
Recommendations Tactical (6 months) e OPEC is in a good position to balance the
oil market, which should limit the price weakness. Along with central banks’ support and with the geopolitical risks remaining, we believe that the potential downside for the oil price has declined, thereby warranting allocation.
Strategic (3-5 years) e We regard the long end of the forward
curve in crude oil as mispriced. To satisfy emerging market demand in the long run, prices around USD 90-95/bbl are unlikely to secure the needed investments to keep supply growing adequately. This gives strategically oriented crude oil investors the opportunity to build up some long- term crude oil exposure over the next three to five years.
Petroleum demand in selected markets
Year-on-year change — in mbpd
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Source: UBS, as of Oct. 2012
Note: Past performance is not an indication of future returns.
For further information please contact ClO's asset class specialists Dominic Schnider, dominic.schnider@ubs.com or Giovanni Staunovo, giovanni.staunovo@ubs.com
Please see important disclaimer and disclosures at the end of the document.
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