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Crude price forecasts climb

Sam Fletcher
OGJ Senior Writer

Barclays Capital in London expects oil prices to average $106/bbl for West Texas Intermediate and $112/bbl for North Sea Brent this year, up from a December forecast of $91/bbl each, and climb to $185/bbl and $184/bbl, respectively, in 2020.

“We expect a sharp compression in the WTI-Brent spread as the year progresses, with the spread remaining prone to dislocation but normally tending towards a small WTI premium,” said Paul Horsnell, Barclays Capital managing director and head of commodities research.

The bank maintained its 2012 forecast of $105/bbl for both Brent and WTI since it already allowed for “a large degree of geopolitical movements, particularly in Iraq and Iran.” Its 2015 forecast also was unchanged, at $137/bbl for WTI and $135/bbl for Brent.

The 2011 price revision reflects “four main changes” since December: “First, stronger fundamentals and continued demand shock. Second, a downwards revision in baseline spare [production] capacity this year. Third, a Libyan outage that we expect to be prolonged, including permanent damage to some fields, and finally, a mixture of other potentially potent and long-running geopolitical situations,” Barclays Capital analysts said.

Oil demand growth in 2010 earlier was estimated at 2.57 million b/d, with 2011 growth previously forecast at 1.56 million b/d. Now 2010 demand growth is put at 2.83 million b/d—making it “the strongest year for global oil demand growth over the past 30 years,” Horsnell said. Demand growth in 2011 is now forecast at 1.76 million b/d.

Total oil demand in 2011 is estimated at 89.3 million b/d, up from of 88.8 million b/d previously. This reduces outlook for spare capacity at the start of this year and for the forecast level at the end of the year, “even before any supply revisions and geopolitically-related outages are accounted for,” Horsnell said. Increased demand coincided with sharp reductions in spare inventory cover. “The excess of US crude and oil product inventories above their 5-year average has almost halved since our last revision, falling from 60.2 million bbl to 32.6 million bbl,” he said.

Saudi production
Saudi Arabia’s production is estimated at 8.2 million b/d. However, Horsnell said, recent data are pointing to Saudi output close to 9 million b/d in December “and at that level in January and February.”

He said, “This has two main implications. First, it is the source of another downwards revision of start-of-year spare capacity levels, since Saudi Arabia’s output has been higher than was originally reported. The second implication is in what it suggests to us about how much Saudi Arabia needs to produce to balance the market.”

Even producing 9 million b/d, Saudi Arabia still has left “a significant deficit at the margin of the market with inventories falling faster than normal, even before Libyan exports came off the market,” said Horsnell. “Allowing for a normal second quarter global inventory build and replacing lost volumes from elsewhere seems likely to require Saudi Arabia to move up to 10 million b/d, in conjunction with higher volumes from the other holders of spare capacity (Kuwait, UAE, and Qatar). Our current estimate of spare capacity places it close to 3 million b/d, with only limited Libyan exports replaced by other volumes thus far.”

The loss of Libyan production as a result of the revolution against Moammar Gadhafi “occurred in a market that is stronger fundamentally and has less spare capacity than was originally thought,” Horsnell said. Like many analysts, he expects the loss of Libyan crude “is likely to become prolonged, regardless of the military outcome.”

He noted, “In Iran in 1978-79, the greatest loss of output was caused by the way in which wells were shut down during the strike. In Libya, it seems very unlikely that industry best-practice shut downs were achieved and we expect that a series of more ad hoc emergency shutdowns is likely to lead to reservoir damage that will mount up over the following weeks.”

(Online Mar. 28, 2011; author’s e-mail: samf@ogjonline.com)


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