By Chris Shaw
Last week the International Energy Agency (IEA) updated on its medium-term outlook for the oil market, a report Barclays Capital suggests contained mixed messages. The report took something of a bearish tone but Barclays suggests there were also some positive features contained in it.
The demand side of the equation has shown above consensus strength according to Barclays, enough to see the IEA revise up its base-case demand projection for 2014 to 91 million barrels per day from a range of 84.9-89 million barrels per day.
On the supply side of the market the report suggests a stronger headline number, but in the view of Barclays this misses some nuances in the data that are positive for the overall oil market picture.
The IEA has pegged total production capacity growth between 2009 and 2015 at 5.5 million barrels per day, but as Barclays points out non-OPEC liquids production accounts for less than 20% of this overall growth. As well, conventional non-OPEC production is expected to contract by one million barrels per day over that period.
The other point made by Barclays is 70% of the increase in non-OPEC output over the period is expected to materialise this year, leaving production to head for an outright contraction in both 2012 and 2013. These numbers do little to suggest the issue of chronic weakness in non-OPEC supplies has finally been resolved.
Some other factors also bode well for higher oil prices going forward in the view of Barclays, one being global oil demand continues to grow at incredibly strong pace. The group notes the June quarter is set to be one of the strongest periods of growth for many years for both OECD and non-OECD demand.
Physical prices have weakened of late but Barclays points out the prompt Brent contango has in recent sessions narrowed to its tightest level in three months. This highlights strength in the underlying physical market in the group's view.
If US$70 per barrel is the bare minimum price required to sustain investment as previously signalled by key producers, Barclays suggests current prices looks rather too low to be sustainable, especially in an environment of a robust global recovery and a solid rebound in oil demand.
Barclays suggests then at some point expectations and outcomes will have to stop diverging, with one or the other giving away. In the meantime, Commonwealth Bank suggests the recent variability in oil prices is likely to continue at least through 2010.
As the bank's chief commodity strategist David Moore points out, oil market fundamentals are not particularly tight at present as oil inventories remain high and the world is not particularly short of surplus capacity.
The fact much of this surplus capacity is under OPEC control leaves the oil prices vulnerable to macroeconomic news flow in Moore's view. It also means the reliance on OPEC production is likely to increase over time, something Moore expects will make OPEC more hesitant on lifting oil production targets.
In Moore's view, current oil prices now embody more conservative assumptions with respect to the US economic recovery. But as the international economy eventually recovers there should be a cyclical improvement in both US oil demand and a boost to demand from developing economies such as China.
Given this scenario, Moore continues to forecast rising oil prices over the medium-term. His estimates call for oil prices of around US$78 per barrel in March next year , rising to around US$90 per barrel by the end of 2011.
ANZ energy commodity strategist Serene Lim is cautious on the short-term oil price outlook, expecting prices will test the US$65-$75 per barrel range in coming weeks. The reason for this caution is the bearish tones from June such as falling global equity prices and rising risk aversion have continued into July.
Lim suggests in such an environment the balance of crude oil price risks appear skewed to the downside at present, as negative demand shocks from the sluggish global economic recovery should outweigh the current negative supply surprises.
Physical trends are also not so positive, as Lim notes reported crude inventories in the US market continue to build. This may add to the current surplus in the market, while a stronger US dollar should also act to cap oil prices.
In Lim's view the current market environment suggests the pace of any demand recovery will not be as strong as was seen in the first half. This means a tightening of the supply/demand balance will be more gradual and more a 2011 event than some in the market had expected.
