Commodities | May 15 2006
By Chris Shaw (Tokyo)
With geopolitical tensions high as the nuclear dispute between Iran and the US continues it isn’t hard to see why the oil price has been strong in recent weeks.
As Commonwealth Bank points out, the issue is a long way from being resolved, so the longer it goes on and the more people become concerned about oil supply thanks to the possibility of sanctions being imposed, the more the oil price is likely to remain at high levels.
The bank notes there are also a number of other factors at play in supporting the oil price currently including the weaker US dollar, which is making oil cheaper in other currencies and so encouraging buying for stockpiling. At the same time, the peak US demand period is drawing closer, while looking ahead a few months there remains the potential for further supply disruptions thanks to hurricane season in the Gulf of Mexico.
An interesting point in the bank’s view is higher prices are in part responsible for the falling supply, as higher profits for the oil companies encourages the levying of higher taxes, which in turn impacts on margins and so discourages the companies from spending on investment. This is most apparent from the number of supply disruptions being experienced recently.
This concern over the sustainability of supply, particularly from non-OPEC producers, is one reason why prices have continued to move higher. The bank suggests non-OPEC supply growth is unlikely to be enough to meet demand needs going forward, so OPEC will remain firmly in control of the downside in terms of the oil price..
Such a view is shared by National Australia Bank, which agrees crude oil prices are being supported in part due to concerns over gasoline supplies in the US. The bank notes oil supplies are actually quite reasonable currently, but the fears of supply disruptions or losses of supply through sanctions on Iran have been responsible for pushing prices higher.
The bank is forecasting an average oil price for 2006 of US$62.25/bbl, but points out the risk to this estimate remains on the upside. Commonwealth is forecasting a range for the year of US$62-US$78/bbl, but suggests if Iran backs down first in its dispute with the US the price could quickly dip below US$67/bbl from current levels of above US$70/bbl.
Its two-year price range is US$56-US$85/bbl, though it suggests the price is likely to go higher the cheaper the US dollar becomes given the impact this has on the oil price in other currencies. National Bank is forecasting an average price of US$60/bbl in 2007.