DOHA: A fall in the price of oil, which has hit a series of all-time highs and touched $126 a barrel on Friday, is contingent upon the stability of the dollar and increase in non-Opec production, according to a report by Saudi Arabia’s Jadwa Investment.
The Riyadh-based investment bank expects oil prices to average $90 this year and $76 in 2009 - because of the lingering effects of deterioration in the US housing market - before rising to $85 in 2010 on expected recovery of the global economy.
The recent upward movements have been the result of institutional investors using oil and other commodities denominated in the dollar as a hedge against the falling value of the greenback, Jadwa Investment said in a report.
However, it saw the dollar stabilising as the size and number of future interest rate cuts drop and other leading global economies slow down, reducing the flows from investors using oil as a dollar hedge.
With global stock markets and interest rates falling, oil and commodities in general, were considered relatively attractive investments, Jadwa said.
Current market prices were well beyond those justified by the fundamentals, it said, adding “given the momentum within the market, there is no reason why prices cannot go on rising over the near term.”
Oil prices have risen dramatically over the last six years and West Texas Intermediate touched $120 per barrel in late April compared with just $19.90 at the end of 2001, an increase of about 500%, yet the global economy has been resilient, it said.
The price rise was the result of the shift in demand rather than a shock to supply, as was the case in the mid-1970s and the early 1980s, it said.
Growth in demand for oil outpaced that in supply and since 2003 global demand had grown faster than non-Opec supply rise, putting pressure on Opec to expand output, Jadwa said.
According to John Lipsky, first deputy managing director of International Monetary Fund, the emerging and developing economies as a group have accounted for about 95% of the growth in demand for oil since 2003.
Finding that over the five years to 2007, global oil demand increased by 8.1mn barrels per day (bpd), Jadwa said China had been the main source of this new demand, followed by the Middle East and the US.
Chinese oil consumption rose by 2.5mn bpd between 2002 and 2007 as the country’s industrialisation entered a more energy-dependent phase, it said, adding the second largest source of new oil demand was the Middle East, where consumption growth of 1.2mn bpd was supported by rapid economic growth and low prices.
Consumption growth in the US, the world’s largest oil consumer, also rose by 1.2mn bpd.
“While demand has surged, non-Opec supply has failed to keep up,” Jadwa said, adding that the non-Opec oil-producing countries had consistently fallen below the benchmark forecasts of the International Energy Agency.
Regular disappointment over new supply had helped push up prices, it said. Lower expectations of future non-Opec supply growth were becoming entrenched in the market and any threats to or actual disruption of supply was putting upward pressure on oil prices, it added.
After many years of under-investment, shortages of technology and expertise have rapidly pushed up the costs and slowed the process of locating new oilfields and bringing their production on-stream, it said.
“This is currently hindered by the global credit crunch, which has raised the cost of securing the necessary finance.”
Opec production, on the other hand, had increased over the last five years and formal production quotas have been raised from 21.7mn bpd in January 2002 to 27.25mn bpd at present (excluding new entrants Angola and Ecuador) and the current output was around 200,000 bpd, the report pointed out.
“Opec producers also have very little spare capacity,” Jadwa said, adding in this environment, the effects of disruptions to supply on oil prices were more pronounced and troubles in Nigeria. Iraq, Iran, Venezuela and Russia in recent years had contributed to higher prices.
“As spare capacity and inventories have dwindled, the oil market has become highly sensitive to news of supply disruptions and geopolitical events. This has pushed oil prices to all-time highs in real terms, surpassing their 1979 peak by some 16%,” Lipsky said, warning that inflation risks have re-emerged.
A slowing global economy should put downward pressure on oil prices but so far the opposite has happened, Jadwa said, reasoning that the fixed fuel prices that shelter consumers in the regions where demand was growing rapidly were unlikely to be adjusted by too much as governments try to contain inflation in the face of rising food prices. |
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