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Oil prices likely to hold steady through 2011 despite supply worries: CIBC World Markets Inc.

TORONTO, May 12 /CNW/ - The oil leak in the Gulf of Mexico and resulting uncertainty about future offshore supply won't likely send oil prices soaring anytime soon, finds a new report from CIBC World Markets Inc.

CIBC's latest Global Positioning Strategy report also notes that even a successful containment of Europe's debt crisis is unlikely to lift oil prices much higher. Instead, several countering forces are "at play" in the oil market that should see prices stay below triple-digit territory over the next 18 months, averaging US$80 a barrel this year and US$85 in 2011.

The forecast by Peter Buchanan, senior economist, is based on the following factors:

-   Many countries including the world's top oil consumer, the U.S.,
        "will have to cut bloated deficits, and the drag from those efforts
        will keep the global recovery's pace from matching past ones,
        restraining oil demand."
    -   Some of the recent resilience in China's oil demand is likely
        temporary, the result of "increased consumption by the power sector
        to offset reduced hydroelectric production resulting from the worst
        drought to hit the country in a century."
    -   Moreover, oil demand growth in China won't fully offset an
        "uninspiring demand picture elsewhere." U.S. oil demand "is still
        about 10 per cent or 2 million barrels per day below the all-time
        peak set in 2007. While a weak economy is responsible for a good part
        of that decline, about a quarter is due to increased competition from
        natural gas, and won't be readily reversed as the economy heals. The
        International Energy Agency is looking for effectively no growth in
        OECD oil consumption this year. That would leave demand still running
        a good 8 per cent below its 2005 peak."
    -   Oil inventory levels globally are "creeping up again." That signals
        "markets are well supplied" and also "makes a further sharp rise in
        prices unlikely for now."
    -   OPEC has five to six million barrels a day of spare capacity and
        could easily use this to meet demand growth in coming months.

Mr. Buchanan further notes that oil prices are cyclical and that there has historically been four to five years on average between price peaks. "That would suggest 2012 or 2013 as the next high water mark for prices, although the exact timing obviously depends on the pace of demand and capacity growth," he says.

"Surging demand historically has amplified price shocks, leading to recession or slower growth, which in turn has begat lower prices. Those have helped to grease the wheels of economic recovery," adds Mr. Buchanan.

Elsewhere in the report, CIBC's Chief Economist Avery Shenfeld notes that the euro zone's bailout plan is unlikely to dampen safe-haven inflows into Canada's bond market. "When it comes to quality, global investors will give credit where credit is due, and Canada's past success in paring deficits will put its bond market in good stead."

The report also notes that the European bailout plan and austerity measures to follow will likely lead to further euro weakness particularly against commodities currencies like the Canadian and Australian dollars and Norwegian Krone. The report highlights several strategies for investors to take advantage of this potential continued weakness in the euro.

The complete CIBC World Markets report is available at:

CIBC's wholesale banking business provides a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.

For further information: Peter Buchanan, Senior Economist at (416) 594-7354,; or Tom Wallis, Communications and Public Affairs at (416) 980-4048,