Commodities | Jul 13 2009
By Greg Peel
The oil price has recently very rapidly fallen from over US$70/bbl to under US$60/bbl, becoming a driving factor in recent stock market weakness. However, the fall has not come as any great shock to most who believed the market had already become a bit carried away. One might suggest the trigger was this month’s worse than expected US employment number, but when a commodity rallies from US$32/bbl to US$72/bbl without barely a blink such a fall to under US$60 again is not the stuff of doom and gloom.
Aiding the fall were data from the US Energy Information Administration suggesting gasoline and diesel inventories continue to build despite “green shoots” and the seasonal effect of the summer driving season, and talk from the US Commodities Futures Trading Comission that limits will be introduced on speculative positions. In the case of the former, oil has been at record inventory levels all through the rally anyway, and in the case of the latter, commodities futures trading already has limits imposed which still didn’t prevent the move up to US$147 and down to US$32.
Analysts don’t like to readjust their oil price forecasts too often, for that would mean constant rejigging of oil stock price targets. UBS has nevertheless decided it’s time to update from previous average price forecasts of US$55.5/bbl for the second half of 2009, US$58/bbl for 2010, US$71/bbl for 2011 and US$76/bbl for 2012. The analysts’ new forecasts are US$65/bbl for 2H09 and US$70/bbl for 2010, with 2011-12 remaining as is.
UBS acknowledges recent price rises have brought oil back to a level which implies a balance of supply and demand, and yet inventory levels should remain above normal levels until the end of 2010. The analysts also note there is still plenty of production capacity going unused at present, mostly in Saudi Arabia, but still they see a US$55-75/bbl range for crude over 2010.
Commonwealth Research is of a similar mindset. It sees crude prices fluctuating in a wide band around current levels for the rest of 2009, but then trending higher in 2010.
Both the International Energy Agency and OPEC have released reports recently suggesting oil demand will remain subdued in the developed world (OECD) out to 2013. The balance will be swayed, however, by demand growth from emerging economies (non-OECD). In the meantime, supply growth will remain depressed outside of OPEC, particularly now the Canadian tar sands projects are no longer considered a bountiful source.