Oil Prices to Remain Choppy

By SARAH KENT

LONDON—The sharp price swings seen in the oil market this year are likely here to stay, as the market remains torn between a weakening global economy and heightening risks to an already tight oil supply.

The push and pull of these two competing themes is expected to keep oil prices volatile in the coming months, causing pain to oil traders unable to stay on top of the market fluctuations.

In a sign of just how confusing the current picture is, revisions to major banks' oil-price forecasts—used by traders as useful market barometers—have become common place in recent weeks. But banks are by no means in agreement on which direction the market will go.

On Tuesday, French bank Société Générale raised its price forecast for European benchmark Brent crude by $10 to $110 a barrel, citing the tight global oil supply picture. But that was followed the next day by a forecast from JP Morgan, which trimmed its Brent forecast for the beginning of 2012 to $105 a barrel, from $115 a barrel previously. The U.S. bank said "the headwind of economic and financial market risks is turning into a gale."

In light holiday trading Thursday, the front-month January Brent contract on London's ICE futures exchange was 65 cents higher at $107.67 a barrel. The front-month January contract on the New York Mercantile Exchange was trading 42 cents higher at $96.58 per barrel.

Physical oil inventories have dwindled in recent months following the Libya supply disruption and other factors. But the dismal global economic picture poses a significant threat to oil demand, with concerns over the state of the economy causing Brent to sink around 6% over the last two weeks.

"People are reassessing their economic expectations. There's far too much uncertainty in the euro zone and that at the moment really is the key factor we cannot determine for next year," said Andrey Kryuchenkov, vice president of commodities research at VTB Capital. "Given that macro risks are still there ... volatility is here to stay."

But countering the current economic uncertainty and boosting oil prices are continuing geopolitical tensions with the potential to severely disrupt oil supply.

Iran has been the key focus in recent days, after the U.S., the U.K and Canada imposed fresh sanctions on the country Monday. But a resurgence of protests in Egypt as well as ongoing problems in Syria and Yemen also pose potential threats to the crude markets.

The risks presented by the current unrest in the Middle East and North Africa are heightened as they follow on from a year in which supply was already interrupted, leading to a drain on crude stockpiles, analysts said.

The loss of some 1.3 million barrels a day in Libyan crude exports for much of the year put a big dent in global oil supply, while production problems in the North Sea, and disruptions due to sabotage and civil unrest in Nigeria, Yemen and Syria further depleted supply.

According to the most recent data from the International Energy Agency, oil inventories in Europe in September were at their lowest level since November 2007, while preliminary data from October show further stock draws.

"Volatility is going to be there right through next year," said Amrita Sen, oil -market analyst at Barclays Capital. "Supply buffers are very thin and in a market like that, there is much higher volatility."

Write to Sarah Kent at sarah.kent@dowjones.com

via online.wsj.com