OUTLOOK '11: Crude likely to fall on slow economic growth

24 December 2010 09:16  [Source: ICIS news]

By Giovanni Coiro

LONDON (ICIS)--Crude oil prices will fall in 2011 from the plus-$90/bbl levels reached this month as the pace of the global economic recovery remains sluggish, market commentators said.

There was a big difference in the estimated extent of the decline, however, with some expecting values to drop to around $80/bbl while others said prices could fall as low as $40/bbl.

The European debt crisis, sluggish economic growth in the US and the threat of inflation in China are the main arguments for lower oil prices next year.

One oil market analyst at Commerzbank said there was risk of weak demand from a slowdown in Europe and the rest of the OECD countries, as well as Asia.

During the first quarter of 2011, the analyst said prices were likely to remain around $90/bbl before falling to the $80/bbl level in the second quarter.

Recent cold weather in Europe has driven up demand for products used for heating, like gasoil and propane, and this will remain one of the main factors supporting oil prices in the short term.

However, despite the cold weather, 2011 was likely to see weak fundamentals push oil prices down.

Paul Hodges, a consultant at International eChem and a regular blogger on ICIS, noted that in addition to the expectations of slow growth in Europe, Asia and the US, high stock levels of crude oil worldwide would add to the downside and lead to a sharp downward correction in prices, noting that we could see prices as low as around $30-40/bbl.

In a research note, BNP Paribas was more bullish, forecasting a drop to around $83/bbl in the first quarter, followed by a gradual increase throughout the year to $95/bbl in the fourth quarter.

Global oil demand has certainly staged a comeback in the second half of 2010…China has been a significant driver of that growth...emerging markets rather than the OECD drive the increase in global oil demand in 2010 and 2011,” the bank said.

However, as Chinese inflation reached 5.1% there was a strong likelihood that the country could increase interest rates to cool the economy, which would have a negative impact on oil prices.

“The fact that China did not raise interest rates last weekend is still giving prices support. However, with inflation at a 28-month high, China’s government officials have little room for manoeuvre and a rate hike is probably only a question of time. This should limit the upside potential for oil prices,” Commerzbank said in one of its daily reports on 15 December.

The US, another major consumer of crude oil, is unlikely to support prices in 2011 as the country’s economy is expected to continue to struggle.

In its last meeting on December 14, the Federal Reserve noted in a press release that “the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment.”

“Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.

“Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in non-residential structures continues to be weak.”

However, as the sluggish economic growth from one of the world’s biggest consumer of crude oil was likely to keep demand subdued, prices could be supported by a weaker US dollar, as the Federal Reserve also noted that it intended to continue with its monetary expansion.

“The committee intends to purchase $600bn (€456bn) of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75bn per month.”

More negative pressure on crude oil demand came from the European economy, which was struggling to exit the debt crisis.

Although OPEC at its last meeting on 11 December decided to keep output unchanged in order to keep prices high, it is unlikely that the organisation will be able to prevent a major downward correction if the pace of Chinese growth slows down and the European and US economies continue to struggle.

($1 = €0.76)

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By: Giovanni Coiro
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