Analysts Confused

Jim Brown
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It is the time of month where we get the new demand estimates from the IEA and EIA and analysts predict the price of oil based on those estimates and the economy. Apparently some analysts are seeing the glass half full and others half empty.

Crude oil forecasts for the next two years were cut by Sanford C Bernstein because of high inventory levels. I can understand their thought process because refined product inventories are at 20-year highs and OPEC cheating has allowed crude inventories to move over normal levels as well.

Bernstein cut their estimated price of crude to $90 a barrel in 2011 from an earlier estimate of $103. They expect it to average $102 in 2012, a -8% cut from prior estimates.

According to Bernstein "oil supply and demand fundamentals are definitely not any worse but aligning the fundamentals to push prices above $100 is not a 2011 event." The end of government stimulus has raised concern that the global economy may slow and reduce energy consumption. They did not mention that $83 oil is also an economic drag and a large incentive to use less fuel.

Bernstein expects oil demand to grow +1.7% to 88.0 mbpd in 2011 while production may only grow to 87.95 mbpd. They believe the shortfall will be made up from the current crude and product inventory in the developed countries of 2.5 billion barrels. Sounds reasonable but just knowing there was a shortfall would push prices well over the $70 they believe is fairly priced today.

A different analyst at Nomura is more bullish. Nomura International is predicting oil prices may reach $100 in the coming year as demand growth exceeds supply. They are predicting $85 a barrel for the rest of 2010.

Nomura believes OPEC spare capacity has declined by 600,000 bpd since March of 2009 and they expect the trend to continue and accelerate in the second half of 2011. They expect inventories to begin to decline towards the second half of 2011 with consumption rising 1.8 mbpd to 88.4 mbpd. Emerging economies are expected to account for 1.4 mbpd.

Of the two analysts I am in the same camp with Nomura. As I stated a few days ago I think OPEC spare capacity for light crude is dropping fast and we are heading for a shortfall unless some OPEC nation that has light crude begins producing more.

The IEA released their latest outlook on Wednesday and they are expecting demand to increase to 86.9 mbpd in 2010 and 88.2 mbpd in 2011. This was an increase of 300,000 bpd. The IEA said they were raising their forecast because of "apparently resurgent" demand in the U.S., Germany and Japan in the last quarter. China also saw imports rise by +11% in September to new record levels.

The EIA released its update this week as well and they are expecting 86.06 mbpd for the rest of this year and that is slightly higher than their 85.95 mbpd last month and 84.33 mbpd in 2009. They are expecting 87.44 mbpd in 2011. That is an increase of 80,000 bpd over their last projection. The EIA is expecting prices to average $83 in 2011. There is slim chance of that happening.

$100 oil is being discussed at the OPEC meetings this week. Some OPEC members have openly said they would like to see higher prices and Venezuela and Libya said they hope to see $100 before year-end. I think there is slim chance of that happening as well.

Saudi Arabia made their unofficial policy statement earlier this week then the oil minister said they were happy with prices at current levels. That is code for "we are not supporting a change in production quotas."

It is interesting that the competing analysts above did not mention the falling dollar in their estimates. If the dollar breaks strong support at 75 on the dollar index we could easily see $90 oil or higher in the next couple months. I personally believe the dollar is going to find support between 75-77 and the upside pressure on oil prices will ease. I think the dollar was an additive to crude prices but not the primary driver.

With the ship channel closing, the strike in France and the daily production declines in Mexico, Venezuela and Angola there is a tightening in supply assuming nobody else increases their cheating.

Jim Brown

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