Short Term Outlook for Crude Oil Prices

October 2010

Recap of Crude Oil Prices Through 2009

As we have seen, a number of recently emerged "structural" background factors mean the global crude oil market continues to be extremely sensitive to market events. In this environment, market events such as OPEC announcements, strikes at oil refineries, or severe weather events can have an impact on crude oil prices. Even market events which do not have significant crude oil supply or demand implications can affect oil prices, as we saw recently during the summer of 2007 (the Israel-Lebanon war caused price spikes even though it had no oil supply or demand implications).

The 2008/09 global recession has provided a temporary "time out" period from this environment of market hypersensitivity to oil-related market events. However, as the economy recovers, it seems possible that the environment of 2007/08 could return. In particular, the following structural factors remain firmly in place:

  1. a large volume of institutional investment in the crude oil market;
  2. falling value of the U.S. dollar;
  3. Asian Oil demand rising;
  4. the rise of NOCs;
  5. related hypersensitivity to geopolitical factors;
  6. rising marginal costs of oil production; and,
  7. the established pattern of slow non-OPEC supply growth.

However, some things are changing. For example, proposed regulatory reforms for commodity markets as described in the previous chapter may reduce the volume of institutional investment in the crude oil market. According to some, this could have an impact by moderating future oil price increases.

Economic Stimulus Measures

To support the global economic recovery trillions of dollars have been spent on stimulus packages by countries around the world. The U.S. government announced a $1.3 trillion dollar toxic asset (e.g. sub prime mortgages) relief plan to help private investors buy bad bank assets, which could help unfreeze the credit market. It also passed a $787 billion stimulus package. Europe and China also introduced massive stimulus packages. Interest rates have also been kept low to stimulate the world's economy.

According to the IMF, the global economy shrank by -0.6 percent in 2009. However, reflecting the impact of recent stimulus measures, the global economy is expected to grow by 4.6% in 2010 and 4.3% in 2011.37 According to the Bank of Canada, the Canadian economy is projected to grow by 3.5% in 2010, 2.9% in 2011, and 2.2% in 2012 after contracting by 2.5% in 2009.38

Over the next few years, the speed of the recovery from the recession will have a strong influence on the direction of oil prices. The stronger the economy, the more support there will be for higher oil prices.

Currency Values & OPEC Policies

The value of the U.S. dollar against the Euro, in December 2009, was 40% lower compared to the start of 2002. As OPEC purchases most of its goods in Europe, its price targets are influenced by the value of the European currency - the Euro.

Current high spare oil production capacity levels could help limit the fluctuations of oil prices in the short-term. However, OPEC's spare capacity is expected to decline in the future as the world's economy recovers and the demand for oil increases. This could create upward pressure on crude oil prices. The IEA has warned that strong recovery in oil demand following the recession could squeeze spare capacity. Given the current decline in oil production investments, this could lead to an increase in prices.

OPEC has a current target of $70 to $80 per barrel for WTI and it is quite pleased with the current price of oil. OPEC's disciplined maintenance of production cuts has helped keep prices at this level. OPEC can be expected to maintain a production strategy which maintains the monetary value of its principal commodity.

Short Term World Oil Demand Growth

According to the IEA39, world oil demand in 2010 is expected to grow by 1.7 Mb/d - from 84.9 Mb/d in 2009 to 86.6 Mb/d in 2010. This represents the first annual increase in oil demand since 2007, and the strongest growth in world oil demand since 2005. Nearly half of the increase in world oil demand growth is expected from Asian countries.

Short Term Oil Supply Growth

In 2010, the IEA40 anticipates that world oil supply will grow by 1.7 Mb/d - from 84.9 Mb/d in 2009 to 86.6 Mb/d. Growth in world oil supply is expected from a number of regions including the FSU countries, Latin America and Asia.

Short Term Outlook for Crude Oil Prices

Oil prices have risen by more than 50% since the start of 2009. In the absence of another major financial meltdown, we do not expect a return to the cheap oil prices of the early 2000s, for the variety of reasons mentioned above. In 2009, crude oil prices averaged $61.65 per barrel, and have increased to over $75 per barrel with markets optimistic about the economic recovery. Table 3 provides some recent oil price forecasts. As seen in this table, the latest forecasts suggest that the price of crude oil could average $80 per barrel in 2010, and $85 per barrel in 2011. Please note, oil price forecasts are often adjusted each month based on market conditions.

Table 3
WTI Crude Oil Forecasts for 2010-2011
Institution 2010 2011
Goldman Sachs $90.00 $100.00
Societe Generale $86.00 $92.30
Barclay's Bank $85.00 $92.00
Bank of America $85.00 NA
Wells Fargo Securities $84.20 $88.00
Credit Suisse $82.90 $80.00
JP Morgan $81.75 $90.00
BNP Paribas $82.00 $91.00
Royal Bank of Scotland $82.00 $85.00
AJM Petroleum Consultants $80.00 $83.50
Scotia Capital $79.00 $80.00
U.S. EIA $78.69 $82.50
BMO Capital Markets $78.00 $85.00
International Monetary Fund $75.30 $77.50
Daiwa $74.00 $85.00
TD Economics $73.00 $76.00
Deutsche Bank $71.00 $80.00
Average $80.45 $85.50
Forecasts as of July 2010

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