While crude oil prices have posted a strong recovery from their late 2008-early 2009 lows, they continue to remain below the recent record highs. The key factor dampening sentiment and weighing on oil prices has been the uncertain sentiment towards the health of the global economy, which has kept prices choppy and vulnerable to the vagaries of economic data and sentiment.
As sentiment stabilises, with demand looking positive and no dissipation in supply side issues, we remain positive on our outlook for crude oil prices through the remainder of 2010 and 2011.
While economic concerns are unlikely to fade away anytime soon, there does appear to have been enough of a reduction in pessimism to support crude oil prices above the $70 per barrel floor. However, there has not yet been enough of an increase in optimism to sustain an immediate break significantly above $80 per barrel.
Market fundamentals for crude oil remain very positive with OECD oil demand growth in the second quarter this year posting its first increase since 2005 and non-OECD oil demand (China, India and the West Asia in particular) reflecting spectacular demand growth in the first half.
China’s underlying oil demand remains robust with the rate of year-to-date demand growth about 870,000 barrels per day. No doubt the second half is going to see a slowdown in growth rates compared with the phenomenal rates witnessed in the first half. But given that these are coming off from an extremely high base, China remains on a solid growth path. Indeed, Chinese oil demand is moving towards averaging above nine million barrels per day in 2010, and with US oil demand growth far less dynamic, the key equation of global oil demand is moving towards being overweight on China rapidly, with China’s role in the oil market no longer just totemic in nature.
On the supply side, our medium-term bearish outlook on non-OPEC production remains in place with ageing oilfields in the UK, Norway and Mexico and with the US and Russian production losing the recent growth momentum.
With healthy demand levels and weak non-OPEC supply growth, we expect the call on OPEC to rise over coming years, leading to a decline in OPEC’s spare capacity. We forecast quarterly averages for WTI at $78 per barrel in the fourth quarter this year, $81 per barrel in the first quarter of 2011 and rising every successive quarter with an average of $91 per barrel in the fourth quarter of 2011. Our 2011 average is of $85 per barrel and we expect WTI prices to rise to average $106 per barrel in 2012.
The author is a London based cross-commodity analyst, Barclays Capital
