Oil prices to rise ‘only in 2011’ due to spare capacity By Shashank Shekhar

An abundant spare capacity of oil that has built up across the world will ensure that oil and gas prices will not rise till late in 2010.

A research team headed by Francisco Blanch, the London based analyst says that the prices “may” considerably rise in 2011.

Oil will marginally cross the $60 a barrel price tag by the end of 2009 to land up at the price of $61 a barrel, the five-member team of analysts said. The West Texas Intermediate (WTI) crude will average at $62 a barrel in 2010, the analysts said.

Francisco Blanch was the only commodity analyst to have correctly forecasted a July price of $147 a barrel for oil the last year.

“With the burst of the credit bubble, global economic activity has collapsed. As a result, capacity utilization has fallen across a broad range of industries. On our estimates, global capacity utilization rates have fallen to 92 per cent for crude oil, 81 per cent for refining, and 86 per cent for liquid natural gas. Thus, we see little potential for energy price spikes in the next 12 months even if the global economy recovers,” Blanch and his team said in a report prepared for Merrill Lynch.

“While the global crude oil market is fundamentally oversupplied at present, we see a tighter oil market balance ahead and we maintain our fourth quarter of 2009 crude oil price forecast of $61/bbl,” the analysts said.

The depressive combination of sharp OPEC output cuts and the worsening outlook for non-OPEC production would lead to a reduction in supply availability in the second half of the year, the analysts said.

“Additionally, the sharp interest rate cuts across a broad range of emerging markets should ultimately help boost energy demand or prices, or both. The main risk to our view is a further deterioration in credit markets,” the analysts said.

This may ultimately lead to a rise in demand in 2010, they added.

“Given the shallow demand recovery ahead and the increased spare capacity in refining and crude oil supply within OPEC, we do not see much upside beyond the next six months and believe WTI crude oil prices will average $62/bbl in 2010,” the analysts said.

Even if the price per barrel of oil does rise, a continuously building up refinery capacity will ensure that the refining margins remain low, Merrill Lynch said.

The demand for gasoline and other petroleum products and therefore their prices will continue to decline, the analysts cautioned.

“While crude oil could move higher in the second half of 2009, petroleum product prices are unlikely to experience similar upward price pressures.

Following years of robust light petroleum product consumption growth and a strong margin environment where demand invariably outpaced supply, a substantial amount of refining capacity is just about to come on line.

“Relative to last year, the imbalance will be particularly acute for distillates and light products and less so for the heavy end of the barrel.”

If capital had been efficiently allocated to the most productive sectors in the global economy, high savings rates in emerging economies would have enabled a high investment rate in key sectors, the analysts said.

“In turn, a high investment rate could have allowed for a higher rate of economic growth in the long-run.

However, excessive leverage and non-productive investment contributed to fuel both a credit bubble and an economic boom,” the Merrill Lynch analysts said.

However, basic laws of economics support a rise in prices. Oil’s price will have to rise again to foster energy efficiency, Merrill Lynch analysts argued.

Analysts said: “As the global economy recovers and demand for oil and other fuels starts to increase again, only a continued upward pressure on prices will provide the signal to refocus policy on energy efficiency.”

“Commodity utilization rates are still high compared to other sectors, so any rebound in economic activity, will likely impact urbanization rates bring in a 1.5 per cent increase in energy demand,” they added.

(Source: business24-7.ae)

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