Oil prices have declined in recent weeks, partly because of concerns about the Eurozone economy, according to QNB Group. However, they still remain high by historic standards.
Oil has been particularly volatile during the last five years. After spiking in 2008, and then collapsing following the global financial crisis, it steadily picked up again during 2009 and 2010 as the global economy recovered. Fears about supply disruption in early 2011 drove prices higher. In a similar way, concerns about the supply impact of EU sanctions on Iran and geopolitical consideration caused a fresh spike in March 2012.
More recently, however, prices have eased somewhat as political risk concerns have eased somewhat. At the same time, optimism about the state of the global economy during the first quarter has been tempered by some disappointing data, such as weaker US job creation. In particular, there have been fresh concerns about the future of the Euro, following the poor showing of pro-bailout parties in the Greek elections. This has also contributed to downwards pressure on oil prices.
The benchmark Brent blend declined from a daily peak of US$128/barrel in mid-March to around US$111 in mid-May. Similarly, WTI, the main US crude, slid from US$110 to US$96.
Oil stocks are currently healthy, with US stocks hitting a 20 year high of 380m barrels in early May. The supply outlook is also good, with global supply rising by 0.6m barrels per day (b/d) in April, mainly due to recovery in Libya and Nigeria, and capacity expansion in Iraq.
In its latest report, OPEC forecast that the growth in world demand during 2012 will be 0.9m b/d. Given a forecast 0.6m b/d growth in non-OPEC supply, it expects the average call on OPEC crude this year to by 30.0m b/d, a slight decline from 2011.
However, there are signs of a potential weakening on the demand front, not only because of the turbulence in Europe but also because of signs of slower growth in China—Chinese exports and imports in April came in well below expectations.
Despite all these supply and demand factors, the International Energy Agency said on May 11th that it still expects prices to remain high. The futures markets see oil averaging around US$113 this year, falling to US$106 in 2013. The median of economists’ forecasts is higher, at US$115 in both years. This compares to an average price of US$90 since the start of 2008.
Oil prices, at a range of US$80-100 would not only exceed the budget breakeven point for a large number of OPEC producers, but would also provide a fair price for both producers and consumers, as has indicated by a number of officials from oil producing countries.
The concern is that persistently high prices—average annual prices only exceeded US$100 for the first time last year—could harm the global economy and hence undermine future demand and prices.
Nonetheless, QNB group states that the oil market has proved itself to be volatile in recent years, and therefore predictions could have a large margin of errors. What is almost certain, though, is that the price will remain comfortably above US$65/barrel, which is the proposed price assumption for the forthcoming Qatari budget.
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