Commodities | Mar 25 2011
– Oil market tighter than previously estimated
– Spare capacity limited
– Barclays lifts oil price forecasts for 2011
By Chris Shaw
With the March quarter coming to a close Barclays Capital has reviewed the oil market, the result being changes to average price forecasts for 2011.
The group now expects West Texas Intermediate (WTI)) will average US$106 per barrel for the year, while Brent is now forecast to average US$112 per barrel. Previous estimates were US$91 per barrel in both cases.
Barclays has left average price forecasts for 2012 unchanged at US$105 per barrel for both WTI and Brent, with prices expected to climb to US$137 per barrel for WTI and US$135 per barrel for Brent by 2015.
Forecasts for 2020 have also been introduced. Barclays expects WTI prices will average US$185 per barrel in that year, while Brent prices are expected to average US$184 per barrel.
There are a number of reasons behind the forecast changes, Barclays noting one is the continuation into 2011 of the positive demand shock that emerged over the course of 2010. Demand growth for last year had been estimated at 2.57mb/d (million barrels per day) and for this year the forecast had been 1.56mb/d, but these have both been revised higher.
Demand growth for 2010 is now expected to come in at 2.83mb/d, which would be the strongest rate of growth in the last 30 years. For 2011, Barclays now expects demand growth will be 1.76mb/d. This implies absolute oil demand in 2011 of 89.3mb/d, up from 88.8mb/d previously.
Higher expectations for absolute demand imply less spare capacity in the market, this before any impact from supply revisions and lost production from geopolitical issues are factored in. Barclays now estimates global spare capacity at around 3mb/d. Spare inventory cover has also come down, Barclays noting the excess of US crude and oil product inventories has almost halved to 32.6mb.
Another factor driving the changes to forecasts for Barclays has been a significant upward revision in estimates of Saudi Arabian output in recent months. From previous estimates of 8.2mb/d, suggestions are the Saudis produced at around 9mb/d in December. This level is understood to have held through both January and February.
As Barclays notes, this increase both reduces global space capacity and suggests an uplift in what Saudi Arabia needs to produce to balance the market. Allowing for a normal inventory build during the June quarter and to replace lost volumes from elsewhere, Barclays now estimates Saudi production may need to increase to around 10mb/d.
All of this suggests an oil market fundamentally stronger and with less space capacity than previously estimated, this at the same time as Libyan production has been impacted by the political issues in that nation.
This impact could last some time, as Barclays suggests there has likely been some reservoir damage that will limit production rates when Libya eventually returns to the market. Other geopolitical issues such as the situations in Bahrain and Egypt are also expected to have a prolonged impact according to Barclays.
This won't help ease market tightness and supports the increases to oil price forecasts by Barclays.