Commodities | Aug 01 2006
By Chris Shaw
While supply and demand are the usual determinants of prices, the oil market is showing it is not always the case as the oil price continues to trade at more than US$70 per barrel despite actual supply being quite strong of late.
National Australia Bank suggests one reason for the strength in prices currently is it reflects the market’s concerns the current Middle East crisis could spread and so have an impact on the oil producing nations in the region. This indicates the market is currently focusing not so much on the fundamentals as much as the potential for these fundamentals to change.
This is seen in the fact oil stockpiles in both the US and Europe are currently higher than normal for this time of year, this despite demand remaining strong. The higher oil price is not expected to stop people from using oil in coming years either, as the International Energy Agency (IEA) is forecasting demand will increase by 1.9% in 2007.
Credit Suisse agrees demand has been stronger than expected given the strength in oil prices, though it notes there appears to be some evidence of a slowing in the rate of demand growth. The point of interest in its view is not that demand growth may be slowing, but it has taken a higher than expected oil price for this to occur, meaning underlying demand is still strong.
National Bank and Credit Suisse both give another reason why the oil price has remained firm – the market simply doubts non-OPEC supply can grow as much as had been expected. While the IEA suggests Eastern European production should grow strongly this year the banks see this as far from a foregone conclusion as higher taxation on the oil sector and attempts by the Russian government to nationalise production are likely to be strong disincentives to lifting production.
At the same time, National’s own forecasts for increased refinery capacity (which has been the major impediment to higher oil supply, not a lack of oil itself) appear unlikely to be met, thanks to a combination of higher costs and a shortage of skilled workers.
Despite this, Credit Suisse sees potential for spare capacity in the market to grow slowly from next year, though OPEC producers are now expected to contribute more to this increase than had previously been assumed. This in turn will allow OPEC to again take better control of the oil price in the future, as it will be responsible for a greater share of world production.
The combination of ongoing strong demand, tight supply and perceptions of possible tightening of supply means there remains upside risk to the oil price in the bank’s view, as market conditions remain tight, meaning any disruption to supply will magnify this tightness and likely push prices higher.
As a result, National has lifted its oil price forecast for this year to US$70.20 per barrel, up from US$65.25 previously. For 2007 it has also lifted its forecast, now anticipating a price of US$67.00 per barrel, as against US$60.00 previously.
Credit Suisse has also lifted its price forecasts, in 2006 to US$68.44 per barrel from US$65.94 and in the period 2007 to 2009 to US$65.00 per barrel from US$55.00. Despite this, it continues to expect in the longer-term the world can be supplied with hydrocarbons of one form or another at a price of around US$50.00 per barrel equivalent, so that remains its long-term forecast.