Commodities | May 26 2008
By Chris Shaw
As the reality of oil at more than US$130 per barrel sets in more and more industry analysts are revising up price forecasts, Canada’s Scotiabank being one of the latest to do so in lifting its estimates to an average of US$125 per barrel this year and US$135-$140 per barrel in 2009. Its new 2008 forecast implies prices in the second half of the year will average more than US$140 per barrel.
The reason for the bank’s reassessment is a review of market supply and demand variables, with its conclusion being non-OPEC supply will remain very tight and it is this that will drive up prices. On its numbers non-OPEC supply will disappoint for the third year in a row, with non-incremental supply set to come in at only around 600,000 barrels per day against previous expectations of around one million barrels per day.
As the world’s second largest oil exporter after Saudi Arabia, Russia is a major player amongst the non-OPEC suppliers yet it continues to have major supply issues, Scotiabank suggesting the problems are partly the result of the onerous levels of production and export taxes that offer little incentive for producers to lift output even at current high prices.
As well the major Sakhalin 1 project is currently being blocked from exporting gas to China by the government and as this effectively limits oil production Russian output is now seen as likely to be flat at best this year. At the same time traditional producers in areas such as Mexico and the North Sea are dealing with lower output thanks to natural field decline and while this would be offset by currently lower OECD demand there remains the issue of no slowing in demand from emerging Asian nations and the Middle East.
The other issue the bank notes is a number of these higher demand countries such as China and Malaysia in Asia, countries in the Middle East and Brazil in South America are being insulated by government subsidies, meaning consumers are not feeling the full force of the recent gains in the oil price. This helps support demand and continues to push the balance towards a tighter market and this in turn supports higher oil prices going forward, hence the increases to the bank’s forecasts.
Commonwealth Bank commodity strategist David Moore agrees non-OPEC supply concerns are continuing to be an issue for the oil market, but despite increasingly positive market sentiment with respect to the oil price he remains of the view the price will correct from its current elevated level.
Moore also expects the US dollar to recover modestly over the course of coming months and if this occurs he sees it as helping oil prices to ease from current levels. Having said that he acknowledges the upside risks to prices remain clearly in evidence given the worries over non-OPEC production.
Market participants have increased their price expectations in recent months to reflect the potential for a tighter than previously expected market. This has turned up the oil price futures curve. Moore still expects the oil futures to return to a downward slope in coming months as market players slowly come to question the sustainablility of current prices.
If this occurs spot prices will follow, though with risk at present seemingly tilted to the upside it would, as market commentator Dennis Gartman previously said, be a brave or foolish man who tried to predict the top for oil prices.