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Tuesday, May 31, 2011

Julian Jessop, Why oil price could be below $90 by the end of 2011

Julian Jessop, Why oil price could be below $90 by the end of 2011 : Despite a recent rise in the price of a barrel of Brent crude, Capital Economics expects the amount to drop below $90 by the end of 2011.

Making his comments before today's fresh 1.6% spike in the price to leave it standing at $116.54, Capital’s chief international economist, Julian Jessop, pointed out that rebound in oil prices in early 2009 corresponded with the recovery in the world economy. Now however, he said that growth is weakening and threatened by changing policies.

Admittedly, much of the softness in key economies, notably the US, can be explained by the surge in oil prices itself, so demand might pick up again now that prices have fallen by around $10 per barrel in the past month,’ says Jessop.

‘However, there are other reasons to expect global growth to slow further, particularly where policy stimulus is now being reversed. Indeed, even the US is now moving towards fiscal tightening.”

Jessop also stressed that as the year progresses the unrest caused by the Arab Spring should recede, and thus remove additional premiums on barrels. ‘It seems likely that the stalemate in Libya will be resolved, one way or another, in the coming months. In the meantime, there is no sign of significant disruption to supply from other oil producers, notably Saudi Arabia but also smaller players like Algeria.’

The final factor Jessop cites is the strength of the dollar, with the increase in oil prices since last summer stemming from a fall in the value of the US currency. ‘We expect the dollar to recover over the rest of the year as risk appetite fades, not least as concerns about the future of the Eurozone grow again.’

Jessop concludes that these three factors should make oil prices hover between $70-90 per barrel over the next year, with Brent barrels falling to below $90. Lower energy costs will help reduce the prices of foodstuffs and industrial metals. (source ; citywire.co.uk)

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