Rudi's View | Dec 05 2006
By Rudi Filapek-Vandyck
It’s been quite a ride for crude oil over the past few years. The commodity that used to trade in the US$20s for a barrel of sweet crude not so long ago first spooked global policymakers by swiftly surging past the US$30 mark, then by continuing into the US$40s.
Probably the best way to summarise the past two years is that spot oil hasn’t been anywhere near these prices again. It traded mostly deep into the US$50s and US$60s instead. In July this year it peaked by rallying past US$78.
Few would doubt the new paradigm idea these days, but that doesn’t mean everyone is looking into the same direction when it comes to the near term price outlook for crude oil. The more bearish commentators believe the market has had its flirt with the peak oil theory, driven forward by global liquidity chasing temporary fads, but all is about to settle down at lower prices as global economic growth slows. This is the school of commentators who believe oil’s new equilibrium lies in the low US$50s. This would still represent a quantum shift vis-Ã -vis the prices considered ‘normal’ at the turn of the millennium.
To others, such market views are simply further proof that market experts continuously underestimate the new market dynamics in global energy and commodity markets. They foresee a gradual return to US$78 and beyond.
A few of the recent expert market updates suggest the ‘truth’ probably lies in between both views.
The ‘middle ground’ view seems to have the world’s cartel of major oil producing nations on its side with several OPEC members recently suggesting trying to anchor prices around US$60 per barrel, perhaps in a US$57 to US$63 range, might not be a bad idea.
In addition, a survey into current market expectations by SVB Asset Management has revealed that global securities analysts’ expectations currently range between US$58 and US$72 for the opening quarter of 2007, generating a so-called mean price forecast of US$64.73 per barrel. Price forecasts for the remaining quarters of the year suggest a significant drop in volatility with the price range for the 2007 December quarter between US$53 and US$71 for a mean price forecast of US$61.73.
One of the expert teams who recently joined the middle ground view is Credit Suisse. The equity broker’s energy specialists cut their oil price forecasts at the end of November and now believe the oil price is about to enter a period of price plateauing. The process is likely to take four years, says Credit Suisse.
One of the main characteristics of this ‘plateau period’ is that the oil market will still be operating in marginal demand mode for most of the time, the experts say. They anticipate “a flat pricing period on average, with significant volatility around the central pricing point”, now believed to be at circa US$62.50/bbl WTI.
While the average oil price is on balance forecast to remain in the low US$60s, the futures market is expected to move between price contracts in the high US$50s and the low US$70s during the period, suggesting investors in the sector better buckle up.
Wall Street giant Lehman Brothers recently hired sector specialist Edward Morse as Chief Energy Economist to strengthen the equity broker’s expertise in the field. Morse’s maiden research report paints a much more bullish outlook for oil prices in the year ahead. He agrees with Credit Suisse in that volatility is likely to remain high.
In soft markets, inventories count; in tight markets, capacity counts, Morse explains. It is his view that “a generation of under-investment in the sector lies behind recent capacity constraints and that there are no clear signs that enough capital has yet been deployed in this sector to alter fundamentally today’s tight conditions”.
Morse forecasts an average WTI oil price of US$73.50 for 2007, more than US$10 above what Credit Suisse thinks is feasible, and compared to a price forecast of US$66.40 for the current calendar year. It is his view that the second quarter of 2007 should see an average price forecast of US$73.50 per barrel WTI already.
Like so many other oil specialists, Morse believes the current tight balance between oil supply and demand is more likely to be disrupted at some point by geopolitical events in countries such as Russia, Iran, Venezuela or Nigeria, to name just a few.
Whatever the longer term view, most experts seem to be in agreement the short term trend for spot oil prices is northwards again as winter is about to arrive in the Northern Hemisphere and further pressure on the US dollar is expected to last possibly as far as deep into the second quarter next year. But not before a temporary pause following the sharp run up over the past week.
