Tight supply can’t boost prices, as demand shrinks and supply resumes from Libya
On Monday, Brent oil fell three per cent in London, as news of Libyan rebel forces entering Tripoli started coming in. For the uninitiated, before the civil uprising broke out this February, Libya produced 1.6 million barrels of crude a day. Currently, production is down to 100,000 barrels a day. Analysts are hoping Libya would start pumping more oil and, thus, improve supply-side issues. Even as prices recovered to $109/barrel in Tuesday’s trade, analysts believe Brent could settle around $100/barrel later this year.
This should come as music to India, which is heavily dependent on imported crude. While analysts, over the last couple of weeks, have been forecasting benign prices as global growth slows, the latest development in Libya and slower demand may pull down oil further.
Following what happened in Libya, analysts have revised their base case prices further downwards, as global demand for oil is expected to remain muted and supply could improve due to “secular dynamics within the petroleum complex”. Despite a tightly-supplied summer market, falling oil demand is reflecting the recent macroeconomic headlines and points to lower prices ahead.
For 2011, Citi had targeted a base case price of $92 a barrel for the West Texas Intermediate (WTI), now being reduced to $89/bbl. The target for ICE Brent is $106/bbl (down from $109/bbl). Oil has been volatile this year, with range-bound trading for extended periods, followed by breakout points. Prices entered a breakout phase in the winter to the upside, and, analysts believe the breakout could be to the downside, going forward.
According to Bloomberg data, Brent is trading below its 200-day moving average, signalling a breach of technical support. Prices tend to extend declines when chart-support levels are broken. Citi says: Current prices are tracking what we put forward as low-price case in our July 2011 note, and, the probability of our July 2011 low case materialising has increased. That would call for 2012 average prices of $72/bbl for WTI and $86/bbl for Brent in our new base case.”
Analysts believe oil may be breaking out to a lower trading range in the foreseeable future at pre-Arab Spring levels. If current trends continue through 2012, global demand could come in at 89 million barrels a day (mbd). In contrast, supply is expected to be around 89.7 mbd, which implies a sizeble stock build of 700,000 barrels a day. The trend could continue through 2012, with global supply growing 1.2 mbd to 90.9 mbd. Clearly, neither demand nor supply issues are likely to put pressure on prices.
