Commodities | Jul 06 2010
By Chris Shaw
Oil price action in the June quarter followed something of a zigzag pattern, Barclays Capital noting while average prices have been a little higher than in the first quarter of the year for most benchmarks, the pace of upward momentum has come off the boil.
What has been of interest in the view of Barclays is that while prices have been mixed the flow of global oil market fundamentals has consistently strengthened during the period. In the group's view this suggests the economic recovery from the Global Financial Crisis is finally feeding through to generalized growth through the demand barrel.
For oil demand as a whole Barclays expects the second quarter will be one of the strongest in terms of OECD and non-OECD demand growth for many years. For prices however, this is being offset by the investor fear factor, which is proving stronger than fundamentals at present. This does not seem justified, as in the view of Barclays the recovery seems more than strong enough to support prices once these fears over the global economic growth outlook fade.
Barclays expects over the balance of 2010 the current convergence in growth rates across regions and products will likely continue, with oil-specific balances and the implications of the completion of the economy recovery to offer the basis for most of the surprises in the market.
As evidence of the demand growth of recent periods, Barclays notes in September last year consensus estimates for oil demand growth for 2010 ranged from 0.5 million barrels per day to 1.27 million barrels. In the space of nine months that range has now shifted higher by around 400,000 barrels per day.
This implies a degree of demand recovery not previously anticipated, one that has largely tracked a period of strong, above consensus economic growth. The uneven pattern of demand revisions across the past few quarters reflect different shapes of the recovery cycle across regions, as non-OECD demand started to recover much earlier in the cycle.
By the third quarter of last year Barclays notes non-OECD demand was growing above trend, this acceleration leading to the first round of upward revisions for global demand for 2010. China was the driving force, its apparent demand growing by double digit rates for every month between September last year and April this year.
OECD demand has dragged for much longer, falling short of consensus expectations until only recently. Europe contributed the most to this, but even allowing for the weakness in that market, Barclays suggests recent data indicate a return to positive demand growth for the OECD nations in the second quarter.
This improvement in OECD demand is swinging the balance of power in the oil market, which Barclays suggests means the fall in prices from an average of better than US$80 per barrel in March and April to below US$75 per barrel in May is impossible to justify from a demand-side analysis.
The other factor of note in Barclays's view is oil demand in China and elsewhere is now starting to show signs of a more broad-based recovery in terms of the different parts of the oil barrel. According to Barclays, this means the convergence in the market between OECD and non-OECD demand growth that has started is likely to gain momentum, creating a situation where oil demand across geographies and products reaches a relatively harmonised equilibrium late this year and into 2011.
This supports the oil price forecasts of Barclays, which stand at US$85 per barrel for West Texas Intermediate (WTI) and US$84 per barrel for Brent Crude for 2010. Prices should rise in 2011 to an average of US$97 per barrel for WTI and US$95 per barrel for Brent, while Barclays expects average prices in 2015 of US$137 per barrel and US$135 per barrel respectively.
