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HSBC: Speculation Adds $30 To Oil

Analysts Reports, Business, China, Company Strategy, Economics, Middle East
By John Richardson on 06-Jun-2011

By Malini Hariharan

GROWTH in China and other leading economies has slowed and oil prices have slipped but analysts are predicting strong prices for the rest of 2011 and 2012. Their reasoning is based on continued speculative activity in this commodity and geopolitical risks in the Middle East .

HSBC’s recent report on this subject estimates that speculation has contributed as much as $30/bbl to May’s peak oil price.

This is in line with arguments about we will make about the dysfunctional, and therefore harmful, nature of oil markets in our new ebook – Boom, Gloom and the New Normal.

The analysts point out that “net long positions held by managed funds have roughly doubled since February 2010 and nearly tripled since September 2009”. Each 100m bbl in net long positions is associated with US$20/bbl move in the oil price.

While speculation is shaping markets in the short term, demand and supply fundamentals cannot be ignored, the report adds.

Demand is expected to grow this year but at a slightly slower pace than the 2.9% recorded in 2010.

Beyond 2011,the analysts forecast demand to expand at 1.4-2.0% annually with the bulk of the growth coming from the non-OECD countries. But there is a risk of demand destruction if prices remain above $100/bbl.

Supply from non-OPEC countries is expected to lag behind the estimated 1.5-1.6MMbbl/day increase in global demand annually. OPEC will have to play a balancing role producing a little under 30m bbls in 2011 and slightly above this figure in 2012.

OPEC currently has spare capacity to stop prices from rising but its willingness to use it is another issue. Its spare capacity is also likely to be eroded from 2014 on demand growth which should put upward pressure on prices.

HSBC’s prediction for Brent is $110/bbl in 2011 and $90/bbl in 2012-2013. But other banks are more bullish.

“It is only a matter of time until inventories and OPEC spare capacity will become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supplies,” said a Goldman Sachs analyst.

Goldman Sachs recently raised its its 12-month Brent price estimate to $130/bbl while Morgan Stanley increased its average forecast for Brent this year by 20% to $120/bbl l and by 24 percent for 2012 to $130/bbl.