Is Oil Set to Challenge $100 per Barrel Again?

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Commodities, Supply & Demand

Building on a period of prices fluctuating around $45/barrel in the first quarter of 2009 oil has firmed to $60+ over recent weeks. Does this reflect a growing demand and if so can we expect oil prices to challenge $100/barrel again as some investors are suggesting? Certainly some in OPEC who are meeting this week would like to see a return to higher numbers and are talking up the market. Many Middle Eastern budgets are set on the assumption oil remains above $45-50/barrel.

If the price did move substantially higher it would not be good news for manufacturing companies, demand has been dire since October of 2008 but one of the few silver linings has been lower transport and energy costs.

In reality those same dire markets hold part of the story as to what lies ahead. Demand for oil and oil products have dropped in direct proportion to manufacturing activity and consumer demand. The Energy Information Administration (EIA) has just released its May report further downgrading expectations of 2009 demand by an additional 0.4 million bbl/d, over and above last months 1.8 million bbl/d projected decline. Interestingly this is made up of a fall by 2 million for the OECD countries and a rise of 0.2 million in non OECD countries particularly in the Middle East, China and India. World oil consumption is not expected to grow again until 2010.

OPEC countries have made efforts to cut production. Crude oil production by OPEC (including Iraq) in the first quarter averaged 28.7 million bbl/d, roughly 3 million bbl/d below Q3 2008 levels. But as demand has fallen, surplus production capacity has increased to 4 million bbl/day, no doubt encouraging some producers to cheat. The end result is a growth in inventories. Preliminary estimates suggest that OECD commercial inventories increased by 34 million barrels during the first quarter, reaching 60 days of forward cover, much of the growth building up in the US. There is also an additional 130 million barrels of oil in floating storage as we have reported on previously.

The justification for a price spike is hard to see. Recent price strength appears to have more to do with investor confidence in the stock markets than supply/demand fundamentals for oil. A rising oil price has failed to support the aluminum price, typically an early beneficiary of perceived increases in energy costs. Although some commentators are predicting average prices of $60/barrel in the second half of 2009 with peaks up to $75 and a price of $100/barrel in 2010 we are more inclined to favor the EIA projections of $51.70/barrel for WTI crude in 2009 and $57.73/barrel in 2010. Energy prices at least should remain supportive of a recovery in manufacturers’ profit margins over the year ahead.

–Stuart Burns

Comments (3)

  1. LP says:

    An average price in the $50’s makes sense…There may also be a chance we will see mid 30s again based on the September and October options/futures activities.

    I also think Copper will follow a similar route.

  2. Andy says:

    …i think there’s a growing sentiment of near future supply worries as a driver for price…..there will be a price to pay for the cutback in investment & development that has occured, this isn’t simply undone with the flip of a switch. The industry isn’t stable at 50-60us bbl ….too many areas of the planet suffer in development reductions at these prices & big fields of the planet are in decline. I think the price
    will range siginicantly higher than this prediction.

  3. stuart says:

    Andy i think we are in disagreement only about timescale. in time i agree 100% we have a finite resource that will only rise in price looked at over the longer term.

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