OUTLOOK '10: Crude oil to remain stable around $75/bbl in 2010

24 December 2009 10:00  [Source: ICIS news]

By Giovanni Coiro

LONDON (ICIS news)--Crude oil prices are expected to remain around the $75/bbl mark in 2010 as any increase in demand will be offset by a winding down of product in storage, while a weak US dollar and oil used as an investment asset will support prices above the market equilibrium.

Many banking analysts are predicting oil, despite maintaining its short term volatility or even experiencing a correction, to trade around $75/bbl for much of the year.

In its global oil outlook for 2010, UBS Investment Research said that prices were likely to remain within a wide range of $65-85/bbl due to high inventory levels and spare capacity.

“Oil prices should remain range-bound around $65-85/bbl due to a large inventory surplus and record spare capacity,” the report said.

“While we may see a modest recovery in refining margins as the global economy improves, margins should remain decidedly weak due to material excess capacity.”

A report from BNP Paribas painted a similar picture, predicting Brent and WTI to trade around $81/bbl in 2010.

“Oil most likely will trade within a wide band over the next six months, checked on the upside by bearish short term fundamentals, but finding a support above a fundamental equilibrium level as liquidity remains loose,” the report said.

BNP Paribas said that crude had been used more like an investment than a consumption asset, which would explain the increase in oil futures' prices during the past year despite the market suffering from an oversupply situation.

As US interest rates have decreased due to market conditions, and expectations for any increases in the mid-term unlikely, oil will continue to be used as an investment. This view was recently echoed by Chairman of the Federal Reserve Ben Bernanke, .

“With low nominal interest rates and rising longer term inflation expectation, either because of liquidity condition or concerns regarding high levels of sovereign debt, the implication is weaker real interest rates ahead. This makes oil, gold or equities an attractive alternative for abundant un-leveraged cash to move into.” the report said.

BNP Paribas also noted that as oil floating storage had kept excess supply out of the market, it had allowed oil to trade more like an asset.

The US dollar and its inverse correlation with dollar-traded commodities has been one of the main influences on oil prices during the past year. For much of 2009, a weak US economy forced the Federal Reserve to stimulate the economy by lowering interest rates.

As one of the effects of lower interest rates is for investors to sell currency and seek alternative higher return investments, currency lost value and made oil cheaper, which partly contributed to an appreciation of its value in dollar terms.

However, US interest rates in 2010 are unlikely to change in the near future while US unemployment remained high and the threat of inflation low, said Bernanke in a speech in December.

On supply, oil and product held in floating storage reached record levels in 2009 and traders will be focusing on the winding down of this extra capacity as the global economy improves.

In December, Deutsche Bank estimated gasoil floating storage worldwide to have reached 100m barrels.

Its report said this was an “unusual phenomenon” which had begun earlier in the year, and was partly because the recession had caused low freight rates and a steep contango, making it as economically viable to seek storage offshore.

“Shipping rates were crushed due to the recessionary impact on oil flows and that coincided with the completion of a significant number of new vessels that were added to the global fleet," the bank said.

On the demand side, in its last monthly report of the year, the International Energy Agency (IEA) revised up its demand expectations for 2010 but noted a degree of demand destruction as a result of record high prices in 2008 and a readjustment in consumption patterns due to the ongoing recession.

The agency said its demand forecast for 2009 remained unchanged but that its 2010 prediction had risen to 86.30m bbl/day.

"Yearly growth remains driven by non-OECD [Organisation for Economic Co-operation and Development] countries, but OECD prospects have slightly improved,” the report said.

“Our assumption remains that a degree of structural demand destruction has occurred, notably in the OECD, which may constrain overall levels of demand growth in future,” the report added.

Tony Dillon also contributed to this story

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By: Giovanni Coiro
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