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Oil to top $100/bbl again

As Edmund Burke, British statesman and philosopher, famously said, “Those who do not learn from history are destined to repeat it.” Now, industry analysts are forecasting oil will again top $100/bbl in 2011.

Goldman Sachs Group Inc., known for price predictions beyond the Wall Street consensus, said Dec. 13 continued overproduction will reduce the Organization of Petroleum Exporting Countries’ spare production capacity and might push crude prices above $100/bbl in the second half of 2011.

That prediction came as energy prices escalated after OPEC ministers decided at their Dec. 11 meeting to maintain official production quotas at a total 24.9 million b/d although members actually are producing closer to 29 million b/d.

However, Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, said, “There is nothing magical about $100/bbl, nor is there anything new. It has been part of our 2011 forecast…since early 2009, and it continues to be part of that forecast.”

Although he expects to see $100/bbl in 2011, he does not expect oil will average $100/bbl. He said an average of $85/bbl a year likely would involve periods of trading above $100/bbl.

“Our original forecast [for an average $85/bbl in 2011] all the way back in April 2009 certainly assumed that $100/bbl would be seen at points. When the forecast was put at $95/bbl, or like the current forecast $91/bbl, those averages also embody a certainty of an intrayear high above $100/bbl,” Horsnell said.

While key producers are now “somewhat on the slowish side” in reining in higher prices, Horsnell said, “We do expect that ultimately control will be re-established. An average above $100/bbl at this point would require an explosive upside that can only really be generated by an even greater injection of geopolitical concerns than the already significant escalation that we see as likely. An assumption of limited producer control over the upside generating a $100/bbl average does not seem tenable to us. The perfect storm of political and economic factors that generated a short-lived explosive upside in 2008 is no longer present.”

Even in 2008, he said, “Prices did not average $100/bbl for the year, with the slide in the fourth quarter bringing the annual average for West Texas Intermediate to $99.75/bbl. Our forecast of an average lower than the all-time high but within 10% of it appears to us to be the best base case for 2011. It is in 2012 that we expect the annual record to be broken. Our 2012 forecasts are unchanged at $105/bbl for North Sea Brent crude and $106/bbl for WTI.”

Straddling $90/bbl
Analysts at KBC Energy Economics, a division KBC Advanced Technologies PLC in Surrey, UK, noted crude oil futures prices “continued to straddle $90/bbl” during trading sessions of Dec. 13-17, with the February Brent contract priced just under $92/bbl and the WTI January contract just under $88/bbl on Dec. 17.

“The spread between the two marker grades is currently around $3.40/bbl for February; the January ICE Brent contract went off the board at a $4/bbl premium to the US grade, the biggest gap between the two grades since May,” said KBC analysts.

“The premium held by Brent reflects partly the high stocks that remain at landlocked Cushing, Okla., [storage] where tanks have been filling up as the region absorbs Canadian supply. The inversion of what for many years had been a usual premium for WTI over Brent looks increasingly structural, however, and the futures strip reflects a premium for ICE Brent right out to the back end of the forward curve,” they said.

During that same week, retail gasoline prices ticked up to a new 2-year high, “although the national average stayed just a shade below $3/gal,” said Horsnell at Barclays. “The national average for regular gasoline prices rose by 2.2¢ to now stand at $2.98/gal,” he reported.

Contact Sam Fletcher at samf@ogjonline.com


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