Oil prices eased in European session but stayed at multi-month highs as tensions over Iran remained elevated. Some investors worried that the situation in Iran would replicate that of Libya last year. In 2011, WTI and Brent crude gained +6% and +12% respectively despite the sovereign debt crisis in the Eurozone because tensions in the MENA region resulted in oil supply disruption. Among the countries facing vigorous protests, the civil war in Libya probably has caused the most serious aftermath in the oil market.

State-owned National Oil Corp. stated that production of one of its subsidiaries would reach the pre-war level of 400K bpd by the end of January. In 5 years' time, the country's production will be boosted to 2M bpd, exceeding pre-war level of 1.6M bpd. Currently, total Libyan output has surpassed 1M bpd.

It's important that recovery of Libya's oil production is in good progress as escalated tensions over Iran would cause shortage in oil supply in the near-future. According to BP's statistics, Iran, the world's 4th largest oil producer, produced 4.25M bpd in 2010.

The sovereign debt crisis remained an overhang in 2012. Indeed, problems are expected to deteriorate further this year and cause Eurozone's economy to return to recession. The ECB would feel obliged to act - to speed up monetary easing and asset purchases. CPI estimate of the 17-nation region eased to +2.8% y/y in December from +3.0% a month ago. This was in line with consensus and should give room to the central bank in lowering interest rates further.

In the NY session, the US will report on factory orders which probably gained +1.9% m/m in November, following a -0.4% drop in October.