Sunday, May 09, 2010

Where Is Oil Headed To For The Rest Of 2010?

Oil broke through the US$85/barrel mark in intraday trading on April 1, 2010, sparked by positive economic signs from China and reduced jobless claims in the United States. An acceleration in manufacturing activity in China, according to two industrial surveys, and Japan's most recent report on business sentiment prompted investors to think that increased industrial activity could push up oil demand. A dip in U.S. jobless claims also added to confidence. The Wall Street Journal says the rise comes despite other lackluster data from the United States; a March 31 data release from the U.S. Department of Energy showed a greater-than-expected rise in oil inventories and gasoline stockpiles.

Oil prices dropped more than US$10 per barrel in a week to US$76 on May 7, 2010 on Greek debt worries, unraveling oil's price gains to US$87 since news of an oil leak in the Gulf of Mexico. Nonetheless, oil remains above its US$33/barrel nadir at the beginning of 2009 thanks to the gradual global recovery and increasing demand from non-OECD countries, particularly China. Oil futures prices gained 7% in 2009. Oil supply is likely to recover further in 2011, along with a slight pick-up in demand.

Many expect WTI crude to trade between US$70-US$95, a narrower range than in 2009, and average closer to US$80 per barrel in 2010, higher than the 2009 average of about US$62 but well below that of 2008 (just under US$100 per barrel). The monetary policy stance of the Fed will continue to support energy commodities, but uncertainty about U.S. and Chinese monetary tightening and regulatory changes poses a risk. Increased production from OPEC and non-OPEC members should offset a continued, gradual demand recovery.

Erste Group, in its March 2010 special report on oil, project oil prices to continue increasing mildly in the first half of 2010, targeting at US$90-100. During the second half of 2010, they expect oil prices to dip to the US$60 area or even lower due to expected divergences between supply and demand.

Erste Group projected in its March 2010 special report on oil that oil supply will recover further in 2010. There is enough oil around, but problems associated with the structure of supply, such as the decreasing new oil field ratio, make a clear case for higher prices in the long term. They forecast that, assuming at the current new field ratio, production volume will increase to 125 million barrels by 2030, up from the current 86 million barrels. Demand should pick up again slightly in 2010. OECD demand will rise for the first time since 2005, but the upswing will mainly be supported by countries outside the OECD, especially China. If the economic recovery continues, the high inventories can be gradually drawn down in 2010. The IEA expects global energy demand to double by 2050. The IEA also expects oil demand to increase from 85 million barrels currently to 105 million barrels by 2030.

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