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: http://research.cibcwm.com/economic_public/download/gps_may10.pdf
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