Oil price to average $70-90 per barrel

$90 per barrel could prove too expensive for global recovery

Although crude oil prices have been hovering around $100 per barrel over the last few weeks, prices this year will average at only $70-$90 per barrel, energy analysts and economists, said.

This means while the GCC is slated to see higher oil revenues, oil windfall is not expected to hit dramatic or double-digit levels compared to what it experienced during the boom times.

“Despite recent upticks in oil price, world prices are projected to remain between $70 to $90 per barrel in the medium term, with Opec producers stepping up sales from their ample spare capacity to meet any additional demand not supplied by non-Opec producers,” World Bank said.

Opec is not expected to allow prices to rise beyond this point for fear of inducing additional non-Opec supply or demand substitution, it said.

Globally, there are no medium to longer run supply constraints (2020); and a long- term upper-range of $80 per barrel is consistent with the end-cost of developing additional oil capacity, notably from oil sands in Canada.

“As a result, incomes among oil exporting countries are unlikely to benefit from a substantial exogenous boost over the forecast period,” World Bank added. “Developing oil exporter growth is expected to inch-up to 3.6 percent in 2011-12, on continued strength in domestic demand. Net exports should continue to exert drag, given hefty imports related to infrastructure projects.”

According to the Centre for Global Energy Studies, $90 per barrel oil could prove too expensive for the global economy at this stage of the recovery, especially given the fragile nature of many governments’ balance sheets.

EIA also forecasts average oil price would not exceed $100 this year. Instead, it expects the price of West Texas Intermediate (WTI) crude oil to average about $93 per barrel in 2011, $14 higher than the average price last year. 

For 2012, EIA expects WTI prices to continue to rise, with a forecast average price of $99 per barrel in the fourth quarter 2012.  

Revenues edge up

Overall, the region’s oil revenues increased 28 per cent from $450 billion in 2009 to $575 billion in 2010. The increase helped push the current account- and fiscal positions of most exporters back into positive territory – though 2010 fell well short of 2008 peaks.

The divergent results are tied to the degree of restraint placed on crude oil production and difficulties for several exporters in maintaining current output levels against physical, technology or resource limitations.

Saudi Arabia bore the brunt of production cutbacks during 2009-10; currently 35 per cent of Saudi oil capacity is idle. Oman has been able to boost crude oil output using enhanced recovery techniques, and is not bounded by Opec quotas. During the year oil production increased by between 1.5 and 2.5 per cent across the GCC and developing oil exporters.

According to the IMF, the strength of the recent economic recovery in the Middle East and North Africa (MENA) region is largely supported by the rebound in oil prices from their lows in 2009.

Nonetheless, the scenario of high oil prices will eventually impose significant costs on consumers and businesses in the form of higher energy prices and eventually leading to cost push inflation. Sectors such as air travel, trucking, maritime shipping and petrochemicals heavily consume oil products. These are the core services sectors, which are expected to drive MENA region economic growth in the medium term as investments in real estate sector will remain depressed for some time. 

Upward trend

Oil prices started to see dramatic upward trend during the winter. In December, the Opec reference basket increased to $85-$90 range due to bullish market sentiment, driven by improving macroeconomic expectations and the colder winter in the North Hemisphere.

Declining inventories in the US and growing appetite for commodity investments, such as oil, also supported prices.

The Nymex WTI front month averaged $89.23 per barrel and ICE Brent averaged $92.65 per barrel last month. Futures continued to increase in early January to hit their 27-month highs with Brent around $98 per barrel.

In 2010, the Opec basket averaged $77.45 per barrel up 26.8 per cent from the previous year. The Basket moved higher in January to reach $94.04 on 14 January.

CGES attributes market’s confidence is in large part due to a tightening of the fundamentals – in particular, rising global oil demand in 3Q10 and 4Q10 and Opec’s reluctance to supply more crude.

In the long run, continued rapid growth in overall demand for energy is expected, especially from developing regions with China, India, and the Middle East leading the way. From the supply side, given tight credit condition globally it is expected that only projects nearing completion will be finished while high cost supply oil projects will be delayed, implying that there will not be enough oil supply to meet the growing demand for oil which could eventually cause spike in oil price.

Opec says the rise in crude prices is also part of a general increase across commodities as a whole, as expectations about a continued improvement in the global economy have supported increasing commodity investment.

Gains in most major commodities since the start of the year have even outpaced the 10 per cent increase in crude oil. Agricultural commodities have risen the most with corn prices jumping nearly 50 per cent and wheat up by more than 40 per cent, World Bank data shows.

Precious metals have also moved higher with silver and gold increasing by nearly 30 per cent.

The recent surge in prices cannot be fully explained by a change in oil market fundamentals, as global stocks point to a continued well-supplied market. Despite a stronger-than-usual seasonal crude draw, US crude inventories remain comfortably at 75 million barrels above the five-year average. Product stocks also show a surplus of 46 million barrels over the seasonal average.

At the end of the year, other OECD regions, such as Europe and Japan, have even experienced counter-seasonal builds. Some extra barrels also remained available in floating storage. So, while the total overhang in inventories has declined since August, global inventories continue to be high.

Additionally, in the likelihood of a strong rise in demand or any sudden supply disruption, Opec holds around 6 million barrels per day of spare capacity, which could quickly be made available to the market. Expected demand for Opec crude for this year stands at 29.4 million barrels per day, slightly above the current estimation of Opec production.

A closer look shows that demand for Opec crude in the first half of the year will be lower than current Opec production of 29.2 million barrels per day, which would result in a growing stock cushion.

“It is clear that the overall economic situation has brightened since the start of last year, and expectations for a sustained improvement, particularly in key emerging economies such as China and India, will continue to influence oil market direction,” Opec said. 

Downside risks

But it is still quite possible that events in the wider global economy could take some of the wind out of the oil market’s sails.

Important risks still remain which could impact crude oil prices over the coming months. These include rising sovereign debt concerns in some OECD countries; weaker-than- expected oil demand growth in 2011; excess crude and product inventories, both onshore and offshore; and higher spare capacity in both the upstream and downstream sectors.

A series of disappointing sovereign debt auctions in the Eurozone, especially given their huge financing needs, might yet lead to renewed doubts about the global recovery and/or higher interest rates that could retard economic growth, CGES warns.

“The oil market continues to face significant uncertainties,” Opec notes. “A clearer picture will emerge with the end of the winter season, as the market heads into the lower demand second quarter.”

Until then, there is still an adequate cushion of supply in both inventories and spare capacity to meet the supply needs of the market.

 

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