Commodities | Feb 12 2010
By Chris Shaw
Since early October last year oil prices have been somewhat range bound, National Australia Bank economist Ben Westmore noting the prices has tended to move a few dollars either side of US$77 per barrel for West Texas Intermediate (WTI).
Westmore points out the large physical surplus in the oil market has acted to temper price gains over the past few months, while any moderation in prices has been limited thanks to short-term investor optimism and occasional weakness in the value of the US dollar.
In the view of Commonwealth Bank chief commodity strategist David Moore, the oil price ups and downs of the past month may offer something of a template for the oil market for the rest of 2010, as he expects prices will most likely stay volatile and trade in a relatively broad band.
Moore expects prices will likely creep towards the upper end of the trading range over the course of this year as the global economic recovery becomes more firmly established, while he also takes the view growth in consumption means the world is not as awash in oil as it was a few months ago and this should prove supportive to prices.
This fits in with Westmore's view the oil price will only trend higher when there is an improvement in market fundamentals, though his view is a little more cautious than Moore in that he expects global growth will take some time to rebound as many economies are still transitioning from growth fuelled by public sector stimulus to growth being sustained by stronger private sector demand.
Westmore notes non-Japan Asian demand has recently grown faster than expected, but this has been offset by only modest growth in industrial production levels in most of the large developed economies. As a reflection of this, the International Energy Agency is forecasting global demand to average 84.9 million barrels per day this year against expected supply of 86.2 million barrels, with demand forecast to rise to 86.3 million barrels per day in 2011. One positive is non-OPEC supply is expected to fall slightly in 2010.
While Westmore points out OPEC compliance is weakening as production from some member nations is increasing at present, Moore takes the view production targets for the group will stay unchanged through at least the March meeting as any increase is unlikely until there is clear evidence of a tightening in oil market conditions.
This is expected to take some time and so Moore is forecasting a relatively modest price outlook for oil in 2010. The main risk to his estimates is the still weak trend in US oil demand, but even allowing for this he sees prices as creeping higher, as from an expected average of US$76 per barrel in the March quarter he is forecasting average oil prices of around US$77 per barrel at the end of the June quarter, US$78 per barrel at the end of September and US$80 per barrel by the end of the year.
Westmore's forecasts are for prices to average US$78 per barrel this quarter before rising to US$79 per barrel in the June quarter, US$82 per barrel in the September quarter and US$84 per barrel for the December quarter.