Commodities | Jul 23 2009
By Chris Shaw
In assessing the oil market at present Barclays Capital suggests the standout characteristic is the current dichotomy of views between those expecting significantly lower prices and those seeing equilibirum as requiring prices to eventually settle in a higher but more stable band.
According to Barclays the key question in assessing the oil market now is whether or not US$60 per barrel is viewed as a high or low price, with producers and those looking at longer-term market balances obviously on the side of it being too low and those expecting a reversion to the long-term mean of the view it is far too high.
This is creating the problem of no single view on long-term prices, the group points out the absence of any agreement on a long-term level for prices going forward means there is no benchmark by which to judge whether current price levels are in fact too low or too high.
This makes the last few years an interesting time in the oil market in the group’s view as previously there have been relatively well defined price expectations in the market, but in the last few years this price paradigm has clearly broken down.
According to Barclays, the price action since 2003 has been one of an ongoing price discovery process in response to changing market fundamentals, rather than any discrete adjustment to a supply or demand shock. In other words, in recent years the oil market has adjusted to market imbalances by way of price changes, rather than in previous decades when prices were more or less fixed and adjustments occured via changes in demand and supply.
Late last year the market was hit with a negative demand shock that has temporarily suspended this trend of recent years but, as the group points out, this doesn’t mean the risks of a significant supply side shock have dissipated as they have merely been pushed further out along the calendar.
The fact remains non-OPEC production growth remains weak at best and risks appear to be to the downside, given in 2006 the International Energy Agency was forecasting such output to grow by 3.3 million barrels per day by 2009, only to have now revised this down to around one million barrels.
Given these downward revisions have come during a period of oil price strength shows, in the group’s view, just how tough the industry is finding it to keep supplies flowing. What this means is that supply side issues are clearly still a factor. With the back-end of the oil price curve showing US$40, US$50 or even US$60 per barrel is not high enough to clear medium to long-term balances, it supports the group’s argument prices are not high enough to bring the market back into a more balanced state.
Such a normalisation process may take some time in the group’s view, but as US$60 per barrel is not a high enough price level to generate sufficient investment in the industry to address the market’s supply side problems, prices should continue to rise, with US$75-$85 per barrel looking more like an appropriate range according to Barclays.
Shorter-term the group expects a price band of US$65-$75 per barrel this quarter, though it sees the recent wide fluctuations in price as continuing, especially as its assessment of the market shows demand growth resuming next year, albeit at a modest rate compared to that seen between 2003 and 2007.