Commodities | Feb 27 2008
By Chris Shaw
Oil has again pushed above US$100 per barrel with Nymex West Texas Intermediate (WTI) futures for April closing at US$100.88 last night, but in the view of ANZ Bank senior economist Katie Dean the market has got it all wrong.
Dean suggests it is an anomoly that oil prices are rising at a time when the underlying fundamentals are moving the other way as global demand for oil, which continues to be driven primarily by demand in the US, is actually weakening. As for the China effect, Dean argues this too is being overplayed as the US and Europe, where demand is also slowing, account for 50% of global demand while the Chinese account for less than 10%.
As well, Dean doesn’t agree emerging world demand is impervious to the global economic cycle as while it is reasonable to expect demand to increase as incomes rise in these nations there will still be an element of volatility based on business and consumer spending cycles.
Recent figures suggest US oil inventories are rising at a faster rate this year than any time in the past five years and Dean expects this trend to continue, an outcome that would be disappointing to speculators in the market taking the long side of the trade in the expectation of ongoing market tightness.
Finally, as higher oil prices directly impact on real income and spending levels the longer prices remain above US$100 per barrel the greater is the chance of a global recession, which in turn would see the oil price come back down as such an outcome would see demand fall.
As a result Dean suggests now is a good opportunity to take profits, with her forecast being for the oil price to fall back to around US$80 per barrel by the end of the year. The first potential trigger for such a move to weaker prices in her view is the upcoming OPEC meeting in early March, where it is expected OPEC will keep output at unchanged levels.