Oil Market Outlook

Crude oil prices last week continued to fall after Syria agreed to a Russian proposal, supported by the United States, to place its chemical weapons under international control for destruction later, averting the prospect of a US military strike for now. In addition, Libya recovered some of its oil production capability after the restart of the country’s main crude oil pipeline following weeks of labour disputes.

Tensions also eased between the western powers and Iran, where the new leadership has sent signals of greater willingness to discuss the country’s nuclear programme. The International Atomic Energy Agency will be allowed to inspect the country’s nuclear site to verify Tehran’s claim that its programme is for peaceful purposes only.

However, price declines were limited by the surprise decision by the US Federal Reserve to maintain its quantitative easing (QE) economic stimulus measures until it sees signs of a more durable recovery in the economy of the world’s biggest oil consumer. The Fed has two more policy-setting meetings scheduled this year, in late October and mid-December.

West Texas Intermediate prices declined by $3.54 per barrel over the week to close at $104.67 while Brent fell $2.48 to close at $109.22. Dubai crude, the benchmark for Southeast Asia, dropped about $2 to close at $107.

Thaioil expects Brent to move in a lower range between $106 and $112 per barrel this week and WTI in the range of $102 to $108 per barrel. Factors that should be watched this week are results of Sunday’s German election, which will have implications for economic and financial direction in Europe. Market players will also monitor output in Libya, as well as the debate at the United Nations on a draft resolution on chemical weapon use in Syria. In addition, markets will keep a close watch on US economic indicators for clues to possible future responses by the Federal Reserve. Among the key factors affecting oil prices this week:

The formation of the next German government could present challenges although Chancellor Angela Merkel was expected to have no trouble winning a third term. Ms Merkel’s CDU/ CSU alliance is expected to form the government but it may have to find new coalition partners. All of Europe will be watching for signs of any change in the policies of the region’s strongest economy, especially its appetite for austerity policies supported by Ms Merkel.

Traders will watch the response of markets to the Fed’s decision to keep its economic stimulus measures (QE) in place and continue to buy $85 billion a month in bonds, after last week’s brief bout of euphoria in equity markets. The Fed decision eased market concern over capital transfers from commodity markets last week.

Libya’s crude oil production capacity is expected to improve after pipelines in the west were able to resume operations. It is expected that the production capacity will be restored about 400,000 barrels per day. This will result in Libya’s overall production capability returning to 700,000 barrels per day, still well short of the normal level of about 1.6 million barrels per day in the beginning of the year.

Progress on chemical weapon disposal in Syria will be monitored. Five members of the UN Security Council have drafted a resolution that will be debated this week, and the United States is urging the US to take a tough stand on enforcing an agreement to place the Syrian weapons under international control which will lead to destruction later.