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Don’t bet on big fall in oil—even with slowdown

Don’t bet on big fall in oil—even with slowdown

With debt crises either side of the Atlantic, Europe flirting with recession and Libyan oilfields returning to production, it is tempting to be bearish on oil. Tempting but risky.

November 22, 2011 2:48 by

Despite all the financial and economic gloom, 2011 has been a record year for oil with Brent crude at its highest-ever average above $110 per barrel, and few analysts forecast a big drop in price, even those who expect an economic slowdown.

Rising demand for fuel from China and other emerging economies, declining output from traditional suppliers including the North Sea and interruptions to production in key exporters such as Libya have kept the oil market tight.

And unless the United States, the world’s biggest oil consumer, slips into a double-dip recession, oil prices are likely to stay strong, at least until the end of the northern-hemisphere winter.

“Pessimistic scenarios for oil have not been realised,” said Harry Tchilinguirian, head of commodity market strategy at French bank BNP Paribas. “World oil demand is growing and, if supplies don’t increase, either inventories have to fall or prices rise: both have been happening.”

Global oil demand is likely to have increased by about 900,000 barrels per day (bpd) this year to more than 89 million bpd, according to the International Energy Agency (IEA), which advises major industrialised economies on energy policy.

Next year, world demand for oil will rise even faster, by about 1.3 million bpd, the IEA forecasts, as China,India, Brazil and other emerging economies all use more.

“While headlines are full of…the spectre of recession, it is easy to overlook the fact that oil demand has resumed its growth path and 2011 levels are the highest in history,” said David Wech, head of energy studies at consultancy JBC Energy.

While demand has increased, supply has been inconsistent, with the uprising against former dictatorMuammar Gadaffi removing up to 1.6 million bpd of high quality Libyan oil this year and hiccups in production in Russia, Britain, Norway and Nigeria.

Other factors are also supporting oil.

Despite low levels of consumer confidence, US economic data has consistently out-performed forecasts over the last quarter, bolstering US crude for the last two months.

As the United States moves into an election year, there are widespread expectations that the US Federal Reserve will launch a new round of monetary easing in an attempt to buoy the US economy and increase employment. In the past, such moves have led to rallies in asset prices, particularly oil.

Economists say it would take a significant fall in economic growth to dent oil demand and tip the balance in the oil market towards surplus. And as even more conservative forecasts see global growth around 3 percent, that looks very unlikely.

If oil prices did start to decline, the Organization of the Petroleum Exporting Countries (OPEC) would be likely to step in to curb output, as it did in 2008 during the depths of the financial crisis, analysts say.

If necessary, key OPEC members such as Saudi Arabia are likely to accommodate the resumption of Libyan oil exports by trimming their own production, analysts say.

This is even more likely given the rising cost of production for OPEC members in the Middle East Gulf, which analysts at Deutsche Bank now estimate as high as $86.50 per barrel.

If prices were to approach that level, pressure to reduce output and deliveries to the market would intensify greatly.

Many analysts see the chance of modest falls in oil prices if economic activity in Europe is hit hard by the euro zone debt crisis, but even the lowest forecasts are relatively high.

In the most recent Reuters oil price poll, only two of 35 analysts predicted…(CONTINUED TO NEXT PAGE)

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