In the unusually complex oil market of the present, producers might profitably expect prices to swoon soon and hope events prove them wrong.
Factors other than physical supply and demand are supporting prices, which might, therefore, have more scope to fall than to rise.
The Erste Group of Vienna thinks so, saying in a new report that “the downward risk clearly outweighs the upward potential.”
The big banker of Central and Eastern Europe says oil is expensive by historic standards despite weakly recovering demand and ample supply.
At almost $80/bbl, the price of West Texas Intermediate crude oil is well above its nominal average price since 1982 of $30.90/bbl and its inflation-adjust price of $18.60/bbl.
Part of the reason, the report says, is last year’s revival of commodity investment as governments and central banks, acting to stimulate economies, pushed interest rates to nearly zero. At the same time, the dollar weakened.
“The economic recovery is intact, but we think that the oil price has been clearly overshooting,” says the report.
While oil demand has begun again to rise, especially in developing countries, it remains below historic highs. And China “cannot and will not be the sole driver of the global recovery…nor the only hope for oil demand.”
A special section of the report expands on China’s role in the context of an Austrian School of Economics view emphasizing money-supply growth and credit expansion as prime reasons for oil price gains.
Crucial to the credit expansion last year was China’s October 2008 decision to boost domestic demand with new lending as export markets shrunk.
A 34% increase in Chinese credit in 2009, the report says, was “the decisive factor for the dynamic development of the oil price.” In January this year, however, the Chinese central bank reversed course with credit already shrinking globally.
Continuation of China’s tight-credit policy would contribute to “sluggishness of the oil price,” which the full report expects to start by the second half of 2010.
“We envisage an oil price in the area of $60/bbl by the end of the year,” it says.
(Online Mar. 12, 2010; author’s e-mail: firstname.lastname@example.org)