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Home > Blogs > Ian Fraser and Anthony Harrington > 2011: The Year Ahead - Getting used to $100 oil (or $200 oil?)

2011: The Year Ahead - Getting used to $100 oil (or $200 oil?)

Rising oil prices | 2011: The Year Ahead - Getting used to $100 oil (or $200 oil?) Ian Fraser and Anthony Harrington

A resurgent oil price is likely to be one of the biggest threats to global economic recovery in 2011, especially if the price per barrel breaks back through the $147 peak seen in July 2008. Anything above the $100-barrel mark can be expected to have harmful side-effects, including squeezing industry margins across most sectors and driving up inflation, which would become especially toxic if accompanied by the inflationary effects of surging food prices.

It is therefore disturbing that the consensus among 34 analysts surveyed by Bloomberg earlier this month is for substantial rises in the price of a barrel of crude through the current year. Bloomberg, thorough as usual, opened a roundup of analysts’ predictions with the words:

"Oil demand increasing at almost twice the pace of supply is spurring the most-accurate forecasters to predict the second-highest price on record in 2011. Sanford C Bernstein says crude will average $90 this year. Natixis Bleichroeder sees $100 a barrel, 26% higher than in 2010."

This boils down to a story about supply, demand and speculation. The Bloomberg report added that the global use of oil will rise by 1.7% to a record level of 88 million barrels a day during 2011, but that output would rise by only 0.9%. Analysts at Sanford C. Bernstein predict that as oil prices rise, excess production capacity will fall at its sharpest rate since 2003 as exporters, including the 12 members of OPEC, boost supply.

Oswald Clint, Bernstein’s lead oil analyst in London told Bloomberg:

“We expect OPEC to have to increase their production, causing a reduction in spare capacity, which to us is increasingly becoming a more important determinant of oil prices. Since China became a more important part of the demand pie, the spare-capacity factor has become more important.”

Crude futures on the New York Mercantile Exchange can be expected to average $87 in 2011, Bloomberg’s survey concluded. That would represent the highest oil price since the record $99.75 reached in 2008 and 40% above 2009’s average of $62.09. Spare production capacity in the OPEC nations is about 5.7 million barrels a day, which is enough to absorb this year’s projected consumption increase, claimed Bernstein’s Clint.
Alex Moiseev, principal and chief investment officer at Geneva-based alternatives asset manager Dighton Capital Management believes that the oil price will go even higher than the analysts surveyed by Bloomberg. He said:

“There are major lifestyle changes in emerging markets that are putting massive upside pressure on commodities, even compared with just a few years ago, but we are not seeing much increase in production. This is particularly true of oil, which I expect will go to $200 a barrel or more in the next two or three years. The ongoing devaluation of the dollar will only support nominal prices of oil and other commodities.”

But not everyone shares these views. Frank Schallenberger, head of commodities at Landesbank Baden-Wuerttember in Stuttgart, is much more bearish about the oil price, predicting it will average $87 in 2011. “There isn’t much for the bulls. There’s still too much oil,” said Schallenberger.

Barclays Capital, the investment banking arm of Barclays, has made five predictions for the oil price for 2011, none of which is good news for consumers. It said Opec effectively “paved the way” for further price rises, after it “rolled over existing quotas at the latest meeting on 11 December” and failed to make any clear statements of intent about actions it would take to limit uncontrolled price rises. Barclays Capital predictions are as follows:

1. Oil demand will remain strong in 2011, driven largely by China.
2. Supply will matter more than demand, with growth in supply from non-Opec countries slowing.
3. Opec will become more proactive in increasing supply but will not stop $100/barrel oil.
4. Geopolitics will matter (supply constraints will mean that events such as the Nigerian elections could have a major impact on the oil price).
5. Expect more volatility.

Reuters has issued a warning to oil bulls, however, arguing that 2011 should not be mistaken for a rerun of 2008. For a start, one of the big price accelerators in 2008 was the shortage of refining capacity.

There just wasn’t much spare capacity out there back then. If there is one thing that markets are really good at, it is pouring investment into long lead time big ticket capital projects once there are capacity issues. The only problem is that all that capacity tends to come on stream just as demand slackens off – just ask the shipping industry, which overbuilt rather massively and had new ships swinging at anchor once the global downturn hit, with shipyards around the world churning out more surplus ships almost daily. The second half of 2010 was a wonderful time if you had cash and wanted to buy new ships for pennies in the pound. The global refining industry is not in that position, but there is a great deal of refining capacity set to come on stream during 2011, so there will be no premium there for the oil price from capacity issues – rather the reverse.

Another big difference over 2008 is that there is nothing like the same penchant for nationalizing resources among oil producing nations. Governments had a merry time in 2008 choking back supply to bump up prices, with Venezuela and Russia leading the pack. Both countries are now much keener to boost output in order to protect their economies. Finally, there is also more capacity coming on stream from countries like Canada and Brazil, with the US oil shale saga also set to generate a significant contribution, at least as far as the US market is concerned.

Speculative flows have a bearing on driving the oil price higher, but oil will be just one of a number of attractive commodity plays in 2011, with wheat, cotton and precious metals all looking very attractive – and possibly more so than oil. With different factors tugging it up and tugging it down oil looks set for a volatile ride in the months ahead.

Further reading on commodities and oil prices:

Tags: commodities , oil , oil prices
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