"The sharp run-up in crude prices (51 per cent in 2008) has largely been a result of supply tightness, as measured by available Opec spare capacity, which fell from 3.0 million barrels per day in March 2007 to 2.0 mbpd in May 2008," the July 7 report said.
Project delays and field shutdowns (planned and unplanned) were responsible for the decline in non-Opec supplies. Geo-political tensions, a weaker dollar, and futures interest have amplified the impact of lower spare capacity.
"We expect supply tightness to ease from Q3 of 2008 calendar year, eventually taking crude prices lower. Opec spare capacity is expected to increase from 2.9 mbpd in Q2 to 3.8 mbpd in Q4, and 4.6 mbpd in 2009.
"Spare capacity will improve due to supplies from new non-Opec and Opec projects coming on-stream and weaker crude demand," Edelweiss said.
Better supply outlook arises from the start of new and previously delayed projects in Russia, Brazil, Canada, Gulf of Mexico, Saudi Arabia, Nigeria, UAE, and Iraq. Start-up of earlier shutdown fields also improves supply-side outlook.
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Crude price, it said, will average $ 90 per barrel in FY10. "Crude prices could increase further in the near future due to low Opec spare capacity and inventory buildup in China ahead of the Olympics. However, improved outlook on spare capacity in end Q3 2007 is likely to ease prices thereafter."
Edelweiss estimated crude prices to average $ 115 per barrel in FY09. "Thereon, improved Opec spare capacity will keep FY10 and FY11 averages at $ 90 per barrel and $ 85 per barrel, respectively. We also increase our long-term crude price estimate to $ 85 per barrel, to factor in escalation in upstream costs."
Its listed depreciation of the US dollar and lower-than-expected Opec spare capacity due to significant project delays, outages and geo-political tensions as key risk factors.