Brent should continue to find a floor around $100 over the next 6 to 9 months, despite potential air pockets in demand and stale speculative long positions. OPEC will defend its $100 floor, and conserve spare production capacity, due to mounting geopolitical risks in the Middle East.
Risks to oil prices remain strongly skewed to the upside for the rest of 2013. Middle East tensions have removed significant spare capacity, at a time when the market is seasonally tight. Hence, any further supply disruption would be damaging.
Another upside risk is the potential product-pull on crude prices. Strong diesel demand may already be challenging U.S. refinery capacity. U.S. distillate production is at its highest level in absolute terms and relative to gasoline. High distillate crack spreads motivate refiners to bid up oil grades with the highest distillate output. As a result, crude prices get pulled up.
The U.S. consumer will not feel the pinch until oil prices are much higher, because gasoline cracks are likely to absorb most of the increase in crude. This would support oil demand despite higher prices. This dynamic could push crude prices well above the high end of our $105-115 expected range over the next three months.
All in all, our commodity strategists believe that oil prices are likely to be flat to higher over the next 6 to 9 months.