Commodities | Oct 14 2008
By Chris Shaw
According to Commonwealth Bank commodity strategist David Moore, global oil prices are driven by a simple equation – slower economic growth around the world translates into slower growth in demand for and consumption of oil. With this as a background it is easy to see why oil prices have fallen as much as they have in recent weeks, as volatility and uncertainty in global financial markets has increased fears of a serious downturn in the global economy.
This has flowed through into reduced demand for oil, with the International Energy Agency (IEA) recently revising lower its estimates for global consumption of oil both this year and in 2009 given weaker OECD demand offsetting still solid growth in non-OECD demand growth. The group is now forecasting just a 400,000 barrel per day increase in global consumption this year, while next year it expects an increase of around 700,000 barrels per day.
At the same time the IEA has lowered its expectations for non-OPEC supply to an increase of just 200,000 barrels per day this year and 600,000 barrels per day next year. The demand and supply changes mean the global oil market is now not nearly as tight as was previously the case.
While OPEC recognises this, Moore doesn’t expect the group will make a serious attempt to push prices back up to the US$100 per barrel level given the uncertainty in the global economy at present and the group’s desire to not be seen as contributing to the current economic issues.
Given the market’s volatility of late, the bank’s forecasts are being kept under review but at present the bank expects prices to range between US$90-$100 per barrel through to the end of 2010. As Moore notes, the weaker economic outlook globally means the balance of price risk remains to the downside, so he sees further falls as possible in the short-term at least.
GSJB Were has already moved to factor in this potential downside, with the broker lowering its forecasts on the back of its view the cyclical downturn in prices will last longer than had previously been expected. The broker takes the view the structural bull market remains intact, as there is no change to the fact supply growth continues to be inadequate, but the current environment means prices should hit their low point in the cycle over the next few quarters.
The broker’s revised estimates reflect this view, as its estimate for average prices in the current quarter have been reduced to US$85 per barrel from US$120 previously, while in 2009 its average falls to US$75 per barrel from US$110 and in 2010 to US$100 per barrel from US$140 per barrel previously. Similar cuts have been made to later years, but the broker has not changed its long-term average price forecast of US$85 per barrel.