Commodities | Feb 08 2011
By Chris Shaw
With oil prices again above the psychologically important US$100 per barrel level (at least in Europe), Barclays Capital suggests questions of whether higher oil prices can derail the economic recovery and therefore oil demand have also returned to the market.
In the view of Barclays, current prices are not high enough to put at risk either the economic recovery or growth in oil consumption in the US market. Partly this is because US oil demand is becoming increasingly skewed towards price insensitive sectors, meaning there is limited scope for any immediate reduction in oil usage.
Most of any downward adjustment in demand will need to be borne by the transport sector, as this sector offers limited scope for short-term substitution and there are high costs associated with any change in behaviour. This leads Barclays to suggest large oil price increases will be needed to generate any meaningful demand response.
Looking at historical data, Barclays notes it is the pace of price inflation rather than the absolute price level that is the most important variable in determining the demand dynamics of the US gasoline market. So while prices are at levels in line with those seen early in 2008, price inflation is currently running at a lower pace.
Barclays suggests while steady rises in the oil price are a drag on consumption growth and push headline inflation higher, they are not likely to put at risk any recovery. In contrast, it is sudden spikes in prices that can have a greater impact as such moves are more likely to cause investors to adjust their spending and so slow economic activity.
Barclays points out US gasoline consumption increased by 2.5% in January according to preliminary data, which highlights how the consumer response to gradual price changes tends to be more limited. In the group's view this shows how up to a certain level the price of any demand adjustment may exceed any benefits achieved.
While it is impossible to point to a particular price or inflation level that would create a change in US oil demand, Barclays takes the view that threshold price is somewhere above current prices. In other words, US$100 per barrel is not a level likely to trigger any significant shorter-term change in US oil demand dynamics.
Barclays is currently forecasting a 14% increase in oil prices in 2011 and the group suggests this forecast poses no real threat to the sustainability of the economic recovery and progression along the oil price cycle.
