Commodities | Mar 14 2008
By Chris Shaw
In simple terms, the recent gains in oil prices that have seen US$110 per barrel not long after prices pushed through US$100 per barrel reflects ongoing strong demand, with Westpac senior economist Justin Smirk noting lower demand from OECD nations has been more than offset by growing demand from emerging economies, a trend he expects will continue through 2008.
Adding to this is the fact non-OECD economic growth is more industry intensive than the service oriented growth of OECD nations, which explains why the demand from emerging nations has been enough to counter slower demand from the result of the world and keep the oil market’s fundamentals tight.
Also bullish for oil prices is the supply side of the equation as Smirk suggests the politics of OPEC, the inability of non-OPEC producers to consistently deliver on expectations and continued scope for weather and geopolitical shocks mean a significant increase in supply is unlikely.
This stronger demand from non-OECD nations means producers are having to turn to more costly sources of oil and with input costs also rising this is putting an ever higher floor under the oil price in Smirk’s view. It is a view the market appeared to be agreeing with as for some time the longer end of the forward oil price curve had been moving higher.
But as Smirk points out, as prices moved closer to US$110 per barrel the inversion of the curve created a backwardation situation where prices for future delivery are higher than spot prices and this leads Smirk to suggest it has been a short-term squeeze and speculation in the market that has been the driving force of late.
This increases the odds of a short-term correction in prices that would, in Smirk’s view, bring prices back below US$100 per barrel is possible in coming weeks, with US$90 per barrel possible on his estimates. There is no change to his bullish medium-term view on prices though and this implies a return to levels above US$100 per barrel in 2009.