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$100 oil a near certainty, say analysts |
PARIS: Oil prices of near $100 per barrel caused alarm in consuming countries in 2007 and analysts forecast another tense crude market next year with triple-figure records a real prospect.
Despite a murky outlook for the world economy, crude prices are seen settling at elevated levels, spelling more pain for consumers and a steady flow of petrodollars for the world’s oil exporters.
From a low point of just below $50 per barrel in January, prices doubled in 2007, hitting $99.29 a barrel on November 21, an all-time record.
Oil forecasting is a notoriously difficult business, but few had expected such a run-up—apart from an analyst at investment bank Goldman Sachs who has achieved some fame for foreseeing early in 2005 a “super spike” in prices to $105.
“People at the beginning of this year would never have dreamt that prices would have reached such exalted heights,” said a London-based analyst for the Centre for Global Energy Studies, Leo Drollas.
Goldman Sachs, one of the most active banks in the energy market, raised its price forecasts for 2008 by $10 dollars on December 12, with average benchmark US prices now seen at $95.
The price could reach $105 by the end of 2008, it said. The CGES sees an average of about $90 in the first half of the year and Drollas said a spike to $100 was a possibility, above all if a cold northern hemisphere winter increased demand for heating fuel.
“There are conditions in which we would see well over $100 per barrel, such as a cool winter, tightness of Opec supplies, or non-Opec supply not growing as much as predicted,” he said.
Yesterday, US light sweet crude for February was trading $1.33 up at $97.30 a barrel by 1600 GMT. London Brent crude was around $1.25 higher at $95.19 a barrel.
In a volatile month traders weighed falling stocks of crude, which gives an impetus to prices, against the prospects of a recession in the US.
“There’s a fairly good chance that it will happen,” said a Washington-based analyst for oil consultancy PFC Energy, David Kirsch, commenting on the likelihood of $100 oil in 2008.
“I do have some concerns about demand though. The global economy is weak ... and that’s going to be the worry that potentially keeps you from $100,” he said.
The US is battling double headwinds of crisis in the housing sector, where prices are falling and increasing number of people are defaulting on home loans, as well as tightening credit conditions.
Analysts at investment bank Merrill Lynch pointed to upside risks to prices in early 2008 in research published on December 13 despite the prospect of slowing growth.
“We start 2008 with the lowest OECD industry stocks recorded in four years, resulting in upside risks to near-term prices, particularly in the event of a colder-than-normal northern hemisphere winter,” they said, upping their 2008 average price forecast to $82.
The OECD area includes the 30 industrialised member countries of the Organisation for Economic Co-operation and Development.
The 13-member Organisation of Petroleum Exporting Countries is the only player in the oil industry capable of bringing down prices, but the group shrugged off calls for more crude at a December meeting in Abu Dhabi.
It is held responsible by many for the surge in prices in 2007 by restricting supplies to deliberately take down stock levels in industrialised countries.
“Opec has not been pumping enough. It’s as simple as that,” said Drollas.
Kirsch at PFC said 2007 was the year of “the re-emergence of Opec” after many had said the influence of the organisation, which pumps 40% of world oil, had waned.
He also said the “financialisation of oil,” or the use of oil as an investment product for speculators and even pension funds, was a key theme of 2007 that was set to continue in 2008.
“It started late last year. We’re now seeing different types of investors,” he said.
“Before it was primarily hedge funds, now we’re seeing pension funds, which are very conservative investors, taking long-term positions in oil as part of a larger portfolio strategy.”
Opec members have railed against the role of “speculative” money, which they blame for volatility and high prices.
One factor expected to have less of an influence in 2008 than in previous years is a key geopolitical driver of prices for the last years: Iran.
A recent US intelligence assessment said the Islamic Republic, the second-biggest producer in Opec, had shelved its nuclear weapons programme in 2003, sharply reducing the risk of conflict in the Middle East.
“Next summer prices would have got on edge with traders saying it was now or never for the Bush administration to bomb. At this point, we can say it’s never,” said Kirsch.
Some analysts believe that the soaring oil prices have a knock-on effect on the whole economy - from a commercial side, the production costs of electricity rise, which raises manufacturing costs.
From a consumer side, the price of petrol for cars and other vehicles rises, leading to reduced consumer confidence and spending.
According to a Wall Street Journal report, oil prices will have a severe negative impact on the world economy if they remain high for a relatively longer period.
High oil prices will have a much more serious impact on emerging economies than developed countries, the report said, adding many countries have raised or will raise the retail prices of fuel oil, which will help alleviate the financial burden of these countries and restrain oil consumption.
On the other hand, an oil price hike will increase the burden of both businesses and households and the risk of inflation as well.
The impact on the emerging markets of the non-OECD nations such as China, India and the Middle East will be strong and energy intensive GDP growth, said one analyst.
While China and other Asian economies rely through exports on the external demand from advanced economies for their GDP growth, a slowdown in these economies should only moderate the GDP growth in emerging markets and their demand for oil.
According to an NPR (National Public Radio) report, the impact on the US is not as serious as expected. One reason is that the US economy has shifted from a largely manufacturing to a service economy, and therefore its energy needs, as a percentage of GDP, are lower.
Also, cars and airplanes are, overall, significantly more efficient today than they were 35 years ago.
Others echoed the viewpoint, saying that high oil prices have a limited impact on rich countries.
By taking into account the inflation factor, analysts said oil consumption only represents 3% in consumers’ entire consumption, accounting for half of the figure in the 1980s.
Oil prices are expected to remain volatile as long as factors remain such as US-Iran tensions and the financial market turmoil that followed the American housing mortgage market crisis, an industry expert said.
The world’s financial and oil markets are becoming increasingly connected and oil prices are no longer driven by the fundamentals of supply and demand alone, said Daniel Yergin, chairman of US-based consultancy Cambridge Energy Research Associates (Cera).
Tensions between Iran and the West over the former’s nuclear development have contributed to high global oil prices and affected investment in Iranian oil and gas projects.
Much of the price volatility in the commodity has to do with day sentiment, said senior oil analyst Colney Turner, adding the fact remains however that it is becoming increasingly difficult tolocate additional hydrocarbon reserves.
“Existing reserves across the world are already experiencing declines in output at a time when demand is still strong,” he said.
The $100-per-barrel scenario, while it may not be reached this year, is likely to occur in the not-too-distant future, he said. “This supply-demand issue is not going away and the days of cheap oil are for the history books.” - Agencies |
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