“While demand has failed to contract sharply, supply has fallen short of expected increases,” analyst Francisco Blanch said in a research note. The bank on Monday raised 2012 price forecasts for Brent by $8 to $118 a barrel and for benchmark U.S. crude by $3 to $106 a barrel.
Constrained supplies from OPEC and non-OPEC countries, stabilizing demand from developing markets coupled with robust demand from emerging markets are likely to support oil prices this year and next, the bank said.
“It is important to note that oil demand in the OECD is no longer contracting as fast as it did in Q4 11 … demand for oil in the United States has continued to drop despite an improving economic outlook, but the rate of contraction is no longer increasing,” Blanch said.
“In a market driven by small marginal changes, we believe that the stabilization in the rate of demand contraction has been enough to lend firm support to global crude oil prices.”
With a rebound in Chinese imports in the past couple of months, the demand outlook for non-OECD countries looks robust, suggesting that some emerging markets are likely to continue to gobble up oil at a good speed, the bank said.
“We also doubt that oil prices can continue to escalate from here without creating economic damage in some of the most vulnerable oil-importing economies around the world such as India, Turkey, Spain or Italy,” Blanch said.
Brent oil prices could temporarily hit $140 a barrel this year on the back of higher liquidity, improved demand and tight supplies, the bank said.
“We believe prices could briefly cross $140/bbl and flirt with previous record levels should emerging market demand for oil improve over the next few months against a constrained supply environment,” the bank’s analysts said.
Also a complete disruption of Iranian exports or a shutdown of the Strait of Hormuz could have a much larger impact on prices, potentially adding as much as $100/bbl on top of the current level.
For 2013, the bull story for oil is likely remain intact as the recovery in the global economy leaves oil markets under-supplied relative to the expected pace of growth.
It forecast oil prices to average $120 a barrel for Brent crude and $111 a barrel for U.S. crude in 2013.
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