Oil price forecast revised to $59

The return of greater investor risk appetite since March, coupled with some weakness in the US dollar, has led to higher global oil prices. This has led the Economist Intelligence Unit (EIU) to revise up its oil price forecast to $59 per barrel in 2009 and $65 in 2010.

Demand, however, remains weak and stocks are at all-time highs, the agency said, suggesting that the price recovery has little fundamental support as yet. The agency also noted that a considerable amount of oil remains at sea (stored in ships/ containers) and that if a large amount of this oil were to be released at one time, it would lead to a very sharp drop in the spot price.

Oil prices staged a spectacular collapse in the second half of 2008, with the price of West Texas Intermediate (WTI) falling from a peak of $147 in mid-July to $32 in late December. Prices have subsequently stabilised and trended higher, averaging nearly $45 in the first quarter of 2009 and $50 and $58 in April and May, respectively. Prices subsequently soared to nearly $70 in the first week of June.

Since the beginning of 2009, oil prices have been volatile but on a steadily rising trend. In the past six weeks, the market has chosen to brush off data showing the steady accumulation of stocks and weak demand, and has instead focused on nascent signs of improvement in economic data releases, particularly from the US and China.

This optimism has led to some return of investors' risk appetite, which has boosted commodity prices generally. Rising prices have also led to more consumer hedging (creating demand in the market) owing to fears that prices could go higher. The dollar exchange rate continued to have an impact on the market, with its relative weakness contributing to the rise in prices.

Another important factor has been the contango, or strong premium in forward prices, in the oil market, which has led to market players buying available supply and putting it into storage for sale at a later date. At end-April, according to Oil Market Intelligence, about 130 million barrels were being stored at sea. The contango in the market has since flattened somewhat (removing the incentive to store), but there is still a considerable amount of oil at sea.

Global consumption contracted by 0.3 per cent in 2008, representing the first decline in crude oil consumption since the early 1980s. Consumption in 2009 is expected to contract further, by 2.6 per cent, as severely depressed GDP growth more than offsets the positive impact on demand of lower oil prices.

By 2011-12, the EIU expects growth in oil demand to start to recover in non-OECD countries led by China, India and the Middle East. As a result, global demand is expected to rise to an annual average rate of 1.8 per cent in 2011-13, with growth in non-OECD demand averaging 3.7 per cent.

In response to falling prices, Opec members have agreed to swinging cuts in output totalling 4.2 million bpd from January 1.

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