Commodities | Mar 25 2010
By Chris Shaw
According to Barclay Capital the oil market is at present offering arguments in support of both bulls and bears, the former given ongoing strength in Chinese and emerging Asian market demand and the latter from very weak European demand.
This is creating divergent views about the outlook for oil demand across 2010, a situation exacerbated by the fact data from weaker markets has been far weaker than expected, while data from stronger regions equally have exceeded forecasts.
As examples of this Barclays Capital points out European oil demand recorded its largest ever year-on-year fall in January, while Barclays estimates Chinese demand has risen by a better than expected 1.4 million barrels per day in both January and February. The energy analysts note some estimates are that demand increased by even more than this amount.
This is creating a wide range of forecasts across the market and the various regions, Barclays noting while it is forecasting a year-on-year fall in European oil demand of 520,000 barrels per day, the US Energy Information Administration is expecting year-on-year demand in Europe will rise by around 70,000 barrels at present.
On the supply side the International Energy Agency estimates OECD industry oil stocks rose by around 34.4 million barrels in January, while preliminary data from the International Monetary Fund pointed to a stock draw of around 28.6 million barrels in February.
Commonwealth Bank chief commodity strategist David Moore suggests the wide range of figures implies a situation where current oil market fundamentals are not especially tight. With no dramatic tightening in fundamentals likely in the next few months, he doesn't expect this situation will change dramatically.
Given this, Moore expects the oil price will remain volatile while trading in a broad band from the low US$70s per barrel level to the mid US$80s level. He expects the price will likely end 2010 around US$80 per barrel given the market continues to have an underlying bullish leaning.
What supports the market's bullish stance is the anticipation of international economic recovery, as this implies a strengthening in global demand. National Australia Bank economist Ben Westmore points out the oil price remains very sensitive to demand expectations, as recent gains have been on the back of an apparent improvement in oil product demand.
Stronger demand is expected for 2010 as a whole, Westmore noting International Energy Agency (IEA) forecasts are for global oil demand to rise by 1.8 million barrels per day this year. While China and emerging Asia will be the main drivers of this, Barclays Capital points out both US and Japanese demand have also strengthened of late.
One issue according to Westmore is while oil demand expectations are tied to global economic growth expectations, this link may not be a tight as in the past. He attributes this to evidence of a structural decline in OECD oil demand as consumers exhibit a preference for cleaner sources of energy.
As evidence of a weakening of this link, Westmore notes while the IEA has lifted its forecast for OECD economic growth from flat to an increase of 2.1% in recent months, its forecasts for OECD oil demand growth haven't risen by the same magnitude.
For Westmore this means in the short-term further oil price gains are unlikely until a more durable recovery in OECD demand is seen. Looking further ahead, Westmore expects OPEC is likely to try and tighten the supply side of the market by exerting greater discipline later in the year, this after making no changes to production targets at its meeting this week.
In the meantime, substantial spare capacity implies the rise in oil prices in coming months is likely to be gradual in his view. Barclays Capital shares such an outlook, especially in light of the OPEC decision to maintain its current policy stance.
This supports the Barclays view 2010 will prove to be something of a transition year for the oil market between the demand-side weakness of 2009 and the supply side tightness expected to reappear in 2011.
Demand will improve this year though, as even allowing for the rate of non-OECD demand growth to ease from currently very strong levels, Barclays sees it as enough to outpace the weakness in European demand in particular. This means global oil demand should rise by at least one million barrels per day in 2010, but if non-OECD demand continues to grow at its present rate, Barclays sees the risk to this estimate as to the upside.
In terms of how this plays out with respect to price forecasts in coming months, CBA's Moore is expecting prices will end the March quarter at around US$78 per barrel, easing to US$77 per barrel at the end of June.
The price is then forecast to rise to US$78 per barrel at the end of September and US$80 per barrel at year's end. National Bank's Westmore is a little more bullish, forecasting prices of US$77 per barrel at the end of March, US$79 per barrel at the end of June, US$82 per barrel at the end of September and US$85 per barrel at the end of December.
Barclays Capital is more bullish, forecasting West Texas Intermediate prices of US$78 per barrel for the March quarter, US$86 per barrel in the June quarter, US$84 per barrel in the September quarter and US$92 per barrel in the December quarter.