Analysts raise 2011 oil price forecasts

30 May 2011

$130 a barrel forecast for 2011

Oil prices are currently stable with the US’ West Texas Intermediate (WTI) prices hovering at about $100 a barrel and the European benchmark Brent prices trading near $115 barrel.

The stability understates the day-to-day volatility in the markets. For example, Brent crude hit highs of $127.02 a barrel on April 11 but has since fallen back to $115 a barrel. After briefly falling below $110 a barrel, Brent now averages $110.5 a barrel for the year so far.

On 24 May, major US investment banks, JP Morgan, Goldman Sachs and Morgan Stanley all issued ‘buy’ notes for crude oil, raising their 2011 forecasts to $130 a barrel. Cairo-based regional investment bank, EFG Hermes increased it forecast for average Brent crude oil prices for the year at $110 a barrel, and $105 a barrel in 2012, having previously forecast $98 a barrel for both years.

Crude oil prices rose to their highest levels since 2008 in March, supported by ongoing political unrest across North Africa and the Middle East. However, there have been ongoing concerns that high oil prices may impact demand, whether directly or through inflation and higher interest rates.

Most analysts say the main drivers have not changed with demand growth in developed countries, signs of non-Opec supply growth slowing, and a high-strung geopolitical environment. This is along with the absence of Libya’s light, sweet crude, which has thinned spare production capacity margins. The weakness of the dollar against the euro continues to make US dollar-priced commodities, such as crude, more attractive to consumers using other currencies.

The 12 member states of oil producers’ group Opec have insisted the global oil market is well supplied and price rises are not due to fundamentals. The group is due to meet on 8 June in Vienna, although it has given little indication of its response to the rise in oil prices, nor the loss of approximately 1.3 million barrels a day (b/d) of Libyan crude since its last meeting in December.

Some analysts have pointed out that $130 is a turning point, after which Chinese state-owned refineries start making zero profits. Any higher and demand would collapse, they argue. Given the importance of Chinese demand, this could establish a price ceiling.  

Paul Hodges, chairman of UK-based consultants, International E-Chem, says the analogy is not so simple. After all, state-owned refiner and petrochemicals producer, Sinopec, has consistently operated at a loss over the past few years as oil prices have risen.

“The Chinese economy has been growing too fast and is in danger of overheating – a combination of its stimulus packages and low interest rates over the past two years – but now, the government is trying to slow down,” says Hodges.

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