Commodity Online
Sovereign debt crisis in Europe, a much weaker-than-expected Euro and slightly higher-than-expected non-OPEC supply has forced Bank of America-Merrill Lynch (BofAML) to revises its WTI and Brent crude oil forecasts for second half of 2010 from $92/barrel to $78 per barrel. Yet despite the much reduced likelihood of a robust upswing in global economic activity, BofAML remain cautiously optimistic that the breadth of the recovery outside Southern Europe will prevent a double-dip scenario. Hence it has maintained its 2011 WTI and Brent crude oil price forecast at $85 per barrel.
In view of the slower global economic growth ahead, BofAML has lowered its 2010 world oil demand growth forecast to 1.5 mn b/d from 2.0 mn barrels earlier. It has now predicted 20,000 b/d of growth in OECD regions in 2010 and 50,000 b/d of growth in 2011.The demand expansion in North America and OECD Asia will be offset by contraction in European oil consumption.
Emerging markets will account for greater share of increase in consumption led by China.
On the supply side, non-OPEC countries will expand their supply by 583,000 b/d annualy to 52.1 mn b/d compare to BofAMLs previous estimate of one percent growth.In 2011, non-OPEC supply will rise to 52.4 mn b/d, which is up by 357,000 tonnes or 0.7%. Major additions will come from projects starting in Brazil, China, and the US and
continued ramp up of projects that started last year
A riskier macro environment and a weak supply/demand balance around Cushing, the NYMEX delivery point, triggered a sharp WTI crude oil sell off during the past week.
European banks are becoming more reluctant to lend
Since European banks are large holders of sovereign debt, a sequence of defaults or even just downgrades in the region could precipitate a large correction in bank assets and in turn increase collateral demands. On the liability side, bank funding costs have risen sharply following the rise in sovereign credit spreads Surely, the policy measures announced two weeks ago should ease funding pressures in the near term for European banks, but the recent moves in LIBOR-OIS spreads are showing signs of some short-term funding strains. These moves are not good news for the real economy, as the global economic recovery is partly predicated on an inventory restocking cycle and increased fixed asset investment, two of the most volatile components of GDP. With funding drying up, many companies will likely postpone investment decisions, reducing demand in the short-run, BofAML analysis said.
European sovereign debt crisis encouraging flight to safety
Implied volatilities in cyclical asset classes such as equities and commodities have also spiked in the last month. Investor flows are largely reflecting a flight to safety, and leverage is being reduced across various financial markets. The combination of higher sovereign risk, a falling Euro and the financial regulation bill recently passed in the US Senate should continue to provide support for USDdenominated safe haven assets such as gold and US Treasuries.
Downside risks
GDP growth in China has likely peaked this year at 11.9% and will slowdown in the fourth quarter. Monetary tightening measures will hurt demand prospects in China for oil.
Of the nearly 1 million b/d of additional non-OPEC oil supply expected in 2010 and 2011, Brazil and Russia account for almost 70%. Brazil has five new projects starting within the next two years, representing 355 thousand b/d of additional capacity. Most notable are Baleia Franca and Peregrino, as well as the much-anticipated start up of the Tupi pilot project by the end of this year. Russia has fewer and smaller projects scheduled to start in 2010 and 2011, most notablythe Yuri Korchagin which reached first oil merely weeks ago, but continues to benefit from continued ramp up of very large projects.
