Commodities | Dec 18 2006
By Rudi Filapek-Vandyck
No doubt the energy bulls will have had a good old chuckle this morning when the federal government funded economists and researchers at the Australian Bureau of Agricultural and Resource Economics (ABARE) released their commodities outlook for 2007. ABARE is forecasting an average crude spot oil price of US$56 per barrel next year implying continued heavy downward pressure on the price of oil.
ABARE has joined the oil price bears on the expectation that growth in world oil production in 2007 will be higher than in the past two years. Global oil consumption is forecast to increase to 85.9m barrels a day in 2007 while production is forecast to rise to 86.6m barrels a day. As a result inventories should continue to build up, ABARE argues.
However, a recent industry report by Morgan Stanley analysts suggests all is not lost for those investors punting on a higher oil price in the year ahead. Morgan Stanley has amalgamated all market expectations prior to each year since 1999 and compared them with the actual oil prices throughout the subsequent years. The conclusion: with the sole exception of 2001 when market consensus was for an average spot price of US$26 per barrel and oil didn’t climb higher than an averaged US$20 per barrel throughout the year, market expectations tend to underestimate the price of oil in the following year.
It has to be noted that current consensus market expectation is for oil to average US$62 per barrel in 2007. This is substantially higher than the US$56 per barrel put forward by ABARE. Thus if history repeats itself in 2007, and 2001 remains the sole exception to the principle, oil should substantially beat ABARE’s forecast in the year ahead.
A chart published recently by SVB Financial should keep expectations for a higher oil price in 2007 very much alive and kicking as well. (Seldom seen such striking similarities in historical price patterns, by the way).
Oil rallied US$0.66 to US$63.18 a barrel on Friday. Unforeseen heavy price fluctuations aside, the average price for 2006 should be in the vicinity of US$61 per barrel.
