Commodities | Mar 09 2007
By Chris Shaw
Just as equity markets have bounced this week after last week’s sell-off so too has the oil price, which Commonwealth Bank suggests is a measure of the strength of the influences underpinning the price currently.
The bank points out the driving characteristic of the oil market remains the tight supply-demand balance, which it expects will continue through 2007. Supporting its view is the fact inventories for a number of products in the key US market are at low levels compared to current levels of demand.
Barclays Capital points out demand in the US is rising, with February figures showing year-on-year demand growth for the month of 1.4 million barrels, the largest one-month increase in the last ten years. Importantly, the group points out only a portion of this demand can be attributed to seasonal factors.
When you add in ongoing tensions in the Middle East, particularly with respect to Iran and its drive for nuclear weapons, along with the potential for supply disruptions, the tightness of the market looks fairly well established.
The supply side as always remains the key and the bank notes weather could again play a major role. It already is in a small way given the cyclone in Western Australia is likely to see Woodside’s (WPL) output lower for the period, but with El Nino apparently having given way to La Nina in the northern hemisphere the Gulf region of the US is again on watch for hurricanes later this year, as La Nina apparently creates conditions more conducive to a bad hurricane season.
Overall the bank expects supply to rise by about one million barrels this year (assuming no disruptions), which is below its forecast increase in demand of 1.5 million barrels, much of which is coming from non-OECD nations.
Add in the potential supply side disruptions and the bank expects the oil price to trade above US$60 per barrel. Barclays agrees, suggesting fundamentals are indicative of prices moving to the mid US$60s per barrel in coming months.