Cape Town, 19 March (Argus) — Oil prices are likely to remain in their current band, but with possible downside risk, says trading company Vitol.
Pointing to global GDP growth in the past three years of between 3pc and 4pc, Vitol chief economist Steve Terry said that oil demand is set to continue to grow, by around 1.5pc from 2012 levels, to 91.5mn b/d this year. Particularly driving this growth are subsidies for gasoline in areas such as the Middle East, which encourage more and larger car ownership in countries. But countering this is the explosion in new production, particularly from US shale oil which brought 800,000 b/d of new crude supply to the market last year and is likely to add at least the same this year. Terry also highlighted the growth in Iraqi output and tentatively forecast that production there could reach almost 3.8mn b/d by the end of this year, from around 3mn b/d at present.
In Vitol's analysis, support for Brent prices in a relatively tight band around $110/bl is likely to persist for the remainder of this year, with relatively low volatility. This is not the marginal cost of producing at these levels, which for shale oil is around $60-70/bl and for Canadian oil sands in a $80-90/bl range. Neither does the price include a risk premium, Terry said, pointing to the minimal effect on outright prices of the loss of much Iranian supply because of US and EU sanctions.
Terry said that investment in commodities has been relatively stable in the past three years, with around $120bn of "assets under management" being invested in energy. He said that Opec's effective rationing of its members' production had also helped to achieve a balancing price that suits producing nations. He added that while he expects prices to remain stable, there are risks of a fall. "Demand is going up, but supply is more than adequate," he said.
Diesel demand is likely to continue to lead oil demand growth, but Terry said that he had been surprised by the sharp increase in gasoline demand in 2012. Vitol forecasts that global gasoline demand will grow by 1.3pc this year to 23.5mn b/d, while diesel demand will grow by 1.9pc to 27mn b/d. A side effect of the higher demand for other products will be more production of LPG, climbing by 2pc to 9.7mn b/d. Terry said that unlike motor fuels, which are driven by demand and for which there are no large scale alternatives, prices of LPG are supply-led, and they may fall in coming years as it struggles to find markets.
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