A reversal of fortunes is underway between major energy commodity markets, with global oil prices trending downward while US natural gas has been showing signs of life breaking above $4 per million Btu. In its latest Monthly Oil Market Report, the International Energy Agency discussed their view of why the recent weakening in global oil benchmark Brent futures prices might be “relatively short-lived.”

“By early April, front‐month Brent futures had tumbled to just shy of $104/bbl for the first time since mid‐June, and the backwardation on the Brent curve has eased,” the report said, but oil supply and refining capacity have been growing faster than demand. Backwardation is when prices in the distant future are lower than prompt month prices.

After output setbacks for various reasons, oil supply from Saudi Arabia, South-Sudan, the North Sea and Brazil appear set to rebound. At the same time, OECD demand is looking weak, particularly in Europe “where consumption in 2013 is expected to be the lowest since the 1980s,” the IEA said.

The oil consuming country watchdog sees “clouds on the horizon” as close to 7 million barrels per day of global refining capacity could be offline this month for maintenance, but refineries in the US are coming back online ahead of summer driving season and “global crude runs will likely increase steeply starting next month,” in the IEA’s estimation.

In addition to increasing volumes of crude absorbed downstream, the ever-present geopolitical threats that menace the global oil market continue to percolate and the report points to the Syrian civil war, the Iranian nuclear issue and North Korean aggression as potential oil price increase triggers. Additionally, physical supply threats loom in Libya where security is questionable and Nigeria where attacks on infrastructure have become more frequent after a period of relative calm.

So while fundamentals may be easing, says the IEA, “rarely has the market faced such diffuse risks,” which essentially makes the short-term direction of oil prices a great big question mark.

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