Recent higher oil prices are likely to remain, according to analysis by QNB Capital. Since September 2010, the average monthly price of the benchmark Brent crude oil has increased by 47 per cent to reach $114 per barrel in March 2011, from $78/b.
The recent surge in prices has been driven mainly by a combination of factors. Firstly, supply and demand explains part of the increase. According to the International Energy Agency (IEA), world oil demand bottomed out at 84.2m barrels per day (b/d) in the second quarter of 2009, in the midst of the global recession.
Demand recovered to 89.4 mb/d in the fourth quarter of 2010, the highest ever quarterly average. World supply growth lagged demand growth. This supply-demand gap put upward pressure on oil prices, which rose to an average of $92/b in December 2010. OPEC projects world oil demand to grow by 1.6 per cent in 2011 to reach 87.8 mb/d, from 86.4mb/d in 2010.
Secondly, political unrest in the MENA region led to concerns about oil supplies, which drove oil prices higher in early 2011. The sharpest average monthly rise of 11 per cent occurred in March 2011 when unrest in Libya significantly disrupted oil exports from the country. Libya used to export around 1.3 mb/d of crude oil.
According to the IEA, some supply losses were replaced by increased production from OPEC states. OPEC has a spare capacity estimated at around 5.0 mb/d in February 2011, with Saudi Arabia accounting for the bulk of the spare capacity at 3.2 mb/d. This additional OPEC capacity has failed to relieve the upward pressure on prices.
Finally, overall capital market expectations have become closely related to oil prices, according to QNB Capital. The relationship between oil prices and global stock markets (measured by MSCI’s World Index, a proxy for market expectations) has been witnessing a positive correlation in recent years.
In 2000-06, there was no consistent correlation. In 2007-11, the correlation has been over 80 per cent in each year and over 90 per cent in 2009-11. Higher correlation is increasingly due to the role of speculators and commodity investors. The futures market has been performing strongly in recent years. Brent crude oil futures contracts for December 2012 at the Intercontinental Exchange (ICE) were trading during the first week of April at $114/b.
ICE Brent Crude futures and options recorded an year-on-year increase of 37.6 per cent in February 2011, to average a daily 584,091 contracts, compared to an average daily of 424,577 contracts in February 2010.
There are other mitigating factors that feed into determining oil prices. However, the above have been the main drivers in recent years. Given the current state of the oil market – shrinking spare capacity and continued unrest in the MENA region- oil prices are likely to remain at relatively high levels in the short term.