Oil price to hit new all time-highs, average USD 123 per barrel expected until March 2013

Brent crude rose to a new all-time high of USD 111 per barrel on average in 2011. Even when adjusted for inflation, this was higher than in 2008 and even higher than during the second oil shock of 1979/1980.

March 2012

The factors driving the oil price were supply and the unrest that spread from Morocco to Iran last year. The entire region produces nearly 30 million barrels per day (mb/d) and exports more than 21 mb/d. The increasingly expansive monetary policy of the Federal Reserve, ECB, Bank of England and Bank of China also had a stimulating effect.

As the Federal Reserve is now prepared to continue its zero-interest policy until the end of 2014, this should be supportive of the entire commodities sector, but especially of oil and gold. The foundation for new all-time highs has been laid. “We expect an average price of USD per barrel of Brent on a 1y horizon (until March 2013),” said Ronald Stoeferle, commodity expert at Erste Group. In Europe, the higher oil prices may soon be having an impact on the economy. In euro, the price of Brent has already reached new all-time highs. 

Furthermore, it seems that OPEC currently controls the price more tightly than ever before. In the current environment, prices of USD 90-110 should not yet create any form of demand destruction. It seems as if the oil price were to test the precise price level of that critical threshold and then rise a bit higher with every attempt. However, the cure for high prices is high prices, which means both demand in the OECD countries and supply (unconventional oil, new production methods, etc) are adjusting.

Ronald Stoeferle has identified another price driver in the peak oil scenario:  “In my opinion, the maximum global extraction of conventional oil has already been surpassed. Although I assume that unconventional extraction methods would be able to compensate for this to a great extent, the sources that can be easily exploited have already been largely exhausted.”

In its Energy Outlook 2010, the IEA also reported that the conventional oil production peaked in 2006. The much higher “break-even oil price” is also an important factor. Saudi Arabia meanwhile needs an oil price of USD 80 to achieve a balanced budget and in Russia, the level will be USD 126 this year. Therefore, a large share of exporters needs an oil price of at least USD 80 to USD 90.  “Fiscal vulnerability” is high. 

Moreover, the reserve capacities of OPEC have reached a critical level. As Saudi Arabia has never sustainably produced more than 10 mb/d, it is possible that we will only find out if the reserve capacities actually do exist when an emergency arises. Demand is clearly dominated by Asia. Some 70 percent of additional oil consumption is accounted for by China and India. “The current shift in the paradigm is illustrated, for example, by the fact that last year China overtook the US as the world’s largest consumer of energy,” said Ronald Stoeferle.