Brent crude managed to rally on Friday, preventing a third consecutive weekly decline. Economic gloom abounds – but does this mean the oil price has further to fall?
By Garry White, and Rowena Mason
7:27PM BST 14 Aug 2011
After all, during the fallout from the credit crisis the price went much lower than it is now. The US benchmark West texas Intermediate was considerably lower. On December 23, 2008, the spot price fell to $30.28 a barrel.
The Paris-based International Energy Agency (IEA) last Wednesday lowered its global oil demand forecast by 60,000 barrels per day (bpd) for 2011.
“Overall, global oil demand is expected to average 89.5m bpd in 2011, 1.4pc higher year on year,” the IEA said.
This comes at a time when Saudi Arabia is pumping more oil than it has done in 30 years. In July, the country’s output hit 9.8m bpd. Total Opec output over the month rose to 30.05m bpd from 29.94m bpd in June.
“Output has regained levels close to those seen before the Libyan crisis, although Opec spare capacity now stands at only 3.3m bpd,” according to the IEA.
Of course, Opec can cut output to boost prices, but reports last week suggested that the cartel was not planning to get together before the next scheduled meeting in December.
The economic backdrop continues to darken, a situation certain to curb demand. Analysis by Deutsche Bank released on Friday suggested that every percentage point of lower global GDP growth is worth about one percentage point less oil demand.
However, others believe that even if demand falls substantially, prices could still be supported.
Oswald Clint, an analyst at Sanford C. Bernstein thinks Saudi Arabia may reduce its oil output sooner than it did after the financial crisis in 2008. He argues that the Saudi authorities need oil prices above $85 a barrel to meet their spending obligations.
For example, the Arab nation plans to spend more than $100bn (£61.4bn) on power plants and electricity distribution networks by 2020, as domestic demand soars. Demand is expected to rise by about 8pc a year for the forseeable future.
Also a potential support to the price is that there was a surprise fall in US oil inventories last week. Oil stocks are 10m barrels lower compared to the same time last year.
Crude stocks fell by a surprise 5.2m barrels last week, the Energy Information Administration said in its weekly inventory report. Analysts had been expecting a rise of about 1.5m barrels.
However, some market watchers are not so sure.
On Friday, Commerzbank said that the recovery of oil prices already appeared to be over.
“Given the gloomier economic outlook in major consuming countries, there is no reason to be overly optimistic,” the German bank said. “The latest figures suggest that economic growth in the US has already slowed down considerably.
“France has today reported an unexpected stagnation of GDP in the second quarter. Lending in China was more restricted than expected in July, which should mean lower oil demand there, as lower oil imports have already shown recently,” it said.
So at the moment, market participant are split on the future direction of prices. Opec does not appears to be on the verge of calling an emergency meeting to tighten quotas – and they are not expected to unless Brent heads towards $90 a barrel. But oil output could fall anyway.
“It is conceivable, though, that the additional supply brought onto the market in the past months in replacement of Libya’s production losses could gradually be reduced again, without any emergency meeting,” Commerzbank said. “Saudi-Arabia has unilaterally expanded its oil production since the spring by more than 1m barrels a day. It will therefore be important to watch for signs from Riad.”
So, it looks like the lows seen in 2008 are unlikely to be hit again.
Increased public spending in Opec countries needs oil above $85 to $90 a barrel. Any fall towards that level will see swift action by the oil cartel.
Corn price shoots up
Corn shot up in price on Thursday after the US cut its estimates for crop yields because of the hot weather.
Prices hit an all-time high of just under $8 per bushel in June and the commodity is now trading at $7.14 per bushel. Agriculturals have not been hit as hard as industrial metals and oil in this month’s commodity sell-off.
High corn prices feed through into higher meat prices, because grain is used to feed livestock.
Shine on gold’s upward trajectory could herald new metals boom
For only the third time in 15 years, the gold price reached parity with platinum last week as investors piled into safe havens.
Gold hit a record high above $1,800 per ounce, before easing back slightly. The markets may have rallied on Friday, but demand for stable investments has not gone away.
Some therefore believe other precious metals offer better value given the gold price is up by more than 25pc this year. Ole Hansen, senior client adviser at Saxo Bank, said: “As gold climbed to new peaks silver could not keep up and together with platinum had to accept being left behind. On the previous two occasions parity was reached, platinum responded with a 20pc outperformance during the following months.”
Nick Moore, analyst at RBS, said “platinum is now very cheap relative to gold”.
Experts believe that despite caution around industrial metals, both platinum and palladium have strong fundamental factors behind their prices.
Walter de Wet, an analyst at Standard Bank, said: “We do not change our view on both metals [platinum and palladium] yet. We continue to believe the risk to production in South Africa remains high as wage negotiations continue at platinum mines. Independent from the strike threats, our view is that platinum and palladium should be bought on approach of $1,700 and $700.”