Oil prices may have fallen during the week from their recent record peaks, but they have remained comfortably above the $60 a barrel level – a place where Goldman Sachs said this week that it expects oil prices to remain for rest of the decade.
The raising of the long-term oil price target by Goldman to $60 from $45 was followed on Friday by Merrill Lynch and by JPMorgan. Each increased its long-term target as the oil supply chain from the wellhead to the petrol pump remain very tight and vulnerable to oil supply shocks.
That was evident this week with Ecuador, a producer of low quality oil accounting for less than 0.5 per cent of global production, announcing a halt to some of the country’s oil output. Petroecuador, the national oil company, stopped its 201,000 barrels a day output, or half of Ecuador’s total production, because of protests near its oil fields in the Amazon. That action propelled oil prices $1 higher on Friday.
IPE Brent for October delivery closed up $1.96 to $64.36 a barrel, partially reversing falls of almost $2.70 in the previous two sessions after the weekly US crude inventory report. The benchmark Brent contract is now about 5 per cent below the record $66.85 attained on Monday.
September Nymex WTI settled with a rise of $2.08 to $65.35 a barrel in electronic trade having reached a record high of $67.10 reached last week.
WTI oil futures contracts are priced above $60 until June 2008.
“The argument that long-dated energy futures are high because energy will be expensive forever is a dicey assumption in these historically boom-bust markets,” Katherine Spector, global energy strategist at JPMorgan, wrote in a note.
However, Ms Spector does see energy prices reverting to a higher long-term average price for the future than it has in the past.
“We see $35-$40 range as a reasonable, but conservative assumption for the long-term oil price,” she said. That compares with the long-term average of about $20 a
barrel. Merrill Lynch on Friday increased its long-term price forecast for Brent crude to $41 from $33, and for WTI to $42 from $35.
Despite relatively high oil prices for the past two years and the increasing likelihood of oil prices remaining higher for longer, oil producers are unable to respond quickly to further increases in demand, as formerly idle oil production and petroleum refining capacity are now in use and new projects take more than three years to implement.
With global oil demand expected to rise during the next two years by more than the recent average annual increase of 1.5m barrels a day, the Organisation of the Petroleum Exporting Countries and non-Opec producers will find it a challenge to meet demand.
Merrill Lynch estimates the net increase in Opec output over this year and next year at 1.2m barrels a day after taking account of the annual decline within Opec of 550,000 b/d. Opec forecasts the cartel’s crude oil capacity to rise by 2.1m b/d during 2005 and 2006.
For non-Opec supply, Merrill Lynch cut its supply growth forecasts by 200,000 b/d for both this year and next year, leaving the net increase at 600,000 b/d and 1.2m b/d, respectively.
However, non-Opec supply forecasts have been subject to significant downward revisions.
The International Energy Agency, the energy watchdog for developed countries, has almost halved its 2005 non-Opec supply estimate to 675,000 b/d.
If supplies get tight, then consumers can tap into the oil barrels held in storage by consuming nations. But JPMorgan says inventory levels may not be enough.
The US investment bank says US commercial oil inventories covered an average of 51 days of demand last year, compared with 58 days in 1994 and 69 days in 1984.
“When a hurricane hits or a pipeline breaks, it is apt to pack a bigger punch in a market that now lacks the ‘safety valve’ it had 10 or 20 years ago,” it said.