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BMI Global Oil Market Report Q2 2011: Bull Running
Business Monitor International, Feb 2011, Pages: 14
Bull Running - Q111 Oil Market Outlook
Like a tourist in the packed streets of Pamplona on a July morning, the oil market is ready to run and run. The bulls are stamping and snorting in the corral, ready to give chase. Once unleashed, they could do serious damage to participants and spectators alike. It is a thrilling, but dangerous, time for oil traders and speculators.
Unlike Pamplona’s bulls and runners, there is no clearly defined path for oil prices. We can expect twists and turns as the macroeconomic outlook fluctuates, demand-side optimism waxes and wanes, and production prospects oscillate. While it is clear that 2011 has got off to a good start in oil price terms, it is too early for reckless enthusiasm. Strong and sustained demand recovery is far from certain, while inventories remain high and supply is rising.
The oil market activity of late 2010 was entirely as predicted, with the result that the full year price outturn of around US$77.40 per barrel (bbl) for the OPEC basket was barely above the BMI assumption. Dramatic winter scenes certainly helped provide an end-year shift in sentiment, even if actual crude consumption levels, as 12 months earlier, end up being little changed by the heating oil effect.
Winter may still hold some surprises for the oil market, perhaps helping sustain current crude price strength a little longer. However, the basis for current enthusiasm has far more to do with the global macroeconomic outlook than it does to the supply/demand balance. Speculative activity has soared, consensus forecasts are heading higher and, unless plenty of good news is delivered soon, prices are riding for a fall.
That is not to say that oil prices will struggle in 2011. BMI has long held the view that we will see further appreciation thanks to demand growth, moderate supply expansion and some room for inventories to ease. It may be that the OPEC basket assumption for 2011 of US$80/bbl proves somewhat conservative, but BMI feels strongly that the US$100/bbl scenario is equally overoptimistic. While crude prices are expected to breach the US$100/bbl barrier at some point in 2011, this should prove short-lived. It could also have damaging consequences for fuel use and underlying economic recovery.
As of mid-January 2011, BMI assumptions were that global growth in GDP would exceed 3.0% in the current year and through to 2014, with a likely 3.2% rise in 2011 accelerating to a 3.7% rate of growth in 2012 and 2013. While this has no direct bearing on oil prices and, in fact, little real relevance to oil consumption trends, it does support our view of a steady increase in crude prices that reflects an improved supply/demand balance, greater OPEC influence and falling inventories.
With key countries like China having surprised on the upside in macroeconomic terms during 2010, it is entirely predictable that the oil market bulls are ready for a long run. However, there are numerous obstacles to clear that illustrate the need for a more cautious approach. Put quite simply, the economy is not yet ready for the additional and unwanted burden of soaring energy costs.
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