Commodities | Jun 05 2009
By Chris Shaw
As National Australia Bank Australia and commodities economist Ben Westmore points out, the 22% rally in oil prices in May came despite what continue to be weak fundamentals in the market given US crude oil inventories are at 19-year highs and the International Energy Agency has recently revised down global demand forecasts for this year.
According to Westmore it has been investor appetite driving prices following stronger economic indicators out of both China and the US in May that gave the market some encouragement. As well, the falls in the US dollar over the month meant investors outside the US had increased purchasing power, allowing them to spend more on assets such as oil as a hedge against inflation.
He is doubtful this can last shorter-term however, as any re-assessment of the global economic outlook by investors is likely to see oil prices moderate as at current levels the price is above the level implied by market and global economic fundamentals. As well, comments by OPEC suggesting world oil demand growth has actually fallen this year for the first time since the early 1980s suggest no short-term lift in demand to provide support to the oil price.
Looking out a few more months however and Westmore is more positive on the oil price outlook as he expects world GDP growth will turn positive by late this year and this will provide some boost to demand. When this occurs and current inventories are worked through, he expects OPEC to become more disciplined in production, which will add to upward price pressures in coming years.
What should also prove supportive to the oil price in his view is the current underinvestment on the supply side of the market. Given these factors, Westmore is forecasting a steady rate of appreciation in oil prices in coming periods. For West Texas Intermediate he sees prices averaging US$55 per barrel in the current quarter and US$61 per barrel in the September quarter before increasing to US$63 per barrel in the final quarter of 2009.
The trend should continue through 2010, Westmore expecting average prices of US$66 per barrel in the March quarter, rising to an average of US$74 per barrel by the December quarter next year. This suggests an average petrol price in Australia of $1.28 per litre for that period, up from $1.23 per litre in the March quarter next year and an expected average of $1.18 per litre in the current quarter.