Commodities | Sep 21 2011
– Supply issues proving supportive for oil
– Price risk remains to the downside
– Forecasts revised lower
By Chris Shaw
In the first half of August oil prices weakened significantly relative to July levels, National Australia Bank noting rising market concerns with respect to the US economic recovery and ongoing sovereign debt issues in the EU. But since that time, and despite heightened levels of volatility in financial markets, commodity prices in general and oil prices specifically have remained relatively steady. As NAB notes, for the month to September 15 prices for West Texas Intermediate (WTI) increased by 1.7%, while those for Brent crude rose by 5.9%.
NAB suggests one reason for commodity prices holding up against other risk assets has been near-term supply disruptions. These disruptions include still weak Libyan supply, outages in North Sea fields and a pipeline being attacked in Nigeria.
The supply issues have seen the steepness of the backwardation of the Brent future curve increase, while the contango of the WTI curve has flattened slightly. In NAB's view, this suggests supply issues in the oil market are trumping macro concerns at present.
A key question in coming months will be as to when supply returns to the market, as NAB notes OECD stockpiles in both Europe and the Pacific are tight and weekly inventories at Cushing in the US appear weak.
At present funds are largely net long of oil and the economic growth outlook is weakening. This suggests to NAB that any pick up in Libyan production and an easing of constraints elsewhere could expose prices to downside risk.
As a result, NAB expects prices will decline through the remainder of 2011 as the market will react to recent downgrades to forecasts for global growth. Prices are unlikely to fall too far however, this due to still tight near-term supply levels.
Saudi Arabia's policy of price moderation will be the key to oil prices in the view of RBS. Having recently lifted output to 9.8 million barrels per day, the moves by the Saudi's have lifted OPEC spare capacity to 3.8 million barrels per day. RBS notes this is 9% above the 10-year average. What should also weigh in prices in the view of RBS is rising Iraqi output.
Looking ahead, NAB notes the International Energy Agency's (IEA) latest report suggests total oil demand will be 89.3 million barrels per day in 2011 and 90.7 million barrels per day in 2012. These forecasts are down 0.2% and 0.4% from previous estimates.
In NAB's view a further downgrade to global oil demand is possible as IEA assumptions are still higher than the bank's own forecasts. Weaker Chinese demand is one reason, though NAB continues to expect a soft landing for the Chinese economy and so only limited deterioration in demand growth from that country. US oil product demand has also slowed in recent months, and NAB sees little upside to US demand numbers in the medium-term given modest economic growth assumptions.
Factoring this in, NAB has revised down oil price expectations from those published in August. The bank now expects average prices for Brent crude of US$114 per barrel for the September quarter and US$109 per barrel in the December quarter of this year.
In 2012 forecasts stand at US$108 per barrel for the March and June quarters and US$110 per barrel for the September and December quarters. In WTI terms NAB is forecasting prices of US$91 and US$87 per barrel for September and December quarters this year and US$90, US$95, US$98 and US$100 per barrel for each quarter of 2012.
These forecasts compare to the estimates of RBS, which in annual terms stand at US$107 per barrel this year and US$95 per barrel in 2012 for Brent crude.
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