Commodity Strategists: Oil May Average $93 in 2007

Bloomberg.com: Canada:

"Commodity Strategists: Oil May Average $93 in 2007 "

Sept. 9 (Bloomberg) -- Oil may average $84 a barrel next year, $93 in 2007, and $100 in the fourth quarter of 2007, as demand outpaces supply, Canadian Imperial Bank of Commerce's chief economist said, jumping ahead of other analysts who are trying to catch up with surging prices. Rising consumption in China is straining supplies, and damage from Hurricane Katrina to Gulf of Mexico facilities will delay new oil projects in addition to cutting output now, Canadian Imperial's Jeffrey Rubin wrote in a Sept. 7 report. Global supply will be as much as 2.4 million barrels below projected demand by 2007, and the gap will only be closed as rising prices slow demand growth, Rubin wrote. ``We estimate that 1.8 million barrels per day of consumption must be squeezed out next year through the impacts of higher prices,'' Rubin wrote. The gap between supply and demand grows as much as 3 million barrels a day by 2008. Global oil needs are almost 84 million barrels a day now. The 50 percent rally in oil this year stymied forecasters. They predicted an average $39 a barrel this year, according to the median of 24 analysts, strategists and economists Bloomberg surveyed last December. Oil touched a record $70.85 in New York on Aug. 30, a day after Katrina hit the Gulf Coast. The average price so far this year is $54.77. Canadian Imperial, Canada's fifth-biggest bank by assets, last November predicted oil would average $52 a barrel in 2005, and in April raised the forecast to $55 and added a 2006 estimate of $61, Peter Buchanan, a senior economist who works with Rubin, said in a phone interview. Morgan Stanley, Goldman Other firms are also raising their forecasts. Morgan Stanley's chief economist, Stephen Roach, said this week that he now expects an average price of $64 a barrel for oil next year, and he lowered his global economic growth forecast as a result. Goldman Sachs & Co.'s commodity strategists, including Steve Strongin, raised their 2006 forecast to $68 on Aug. 18. Arjun Murti, a Goldman Sachs equity analyst who tracks oil producers, roiled markets when he said in March that a ``super spike'' could lift prices as has as $105 a barrel. Even as he made that prediction, he forecast an average price of $55 for all of 2006. How high prices will have to go to limit demand and get it back in line with global supplies is hard to predict because of the unprecedented rise in China's energy needs, Rubin said in a phone interview. Consumption in China, the second-largest user of oil after the U.S., and in other expanding Asian economies, is sensitive to rising income and not prices, the CIBC economists said in their report. Per-capita energy use in China in 2003 was about one- tenth of the U.S. rate, according to the U.S. Energy Department. Chinese Demand ``About 42 percent of the growth in global demand is coming from China, where there is virtually no price sensitivity to demand,'' Rubin said in a separate phone interview. ``There's a huge relationship to income growth there, but a very uncertain relationship to price at all.'' The International Energy Agency today said oil demand is being reduced by record prices. The agency cut its estimate of 2005 world oil demand growth for a third month, citing slower fuel sales in China, Thailand and other Asian countries. Chinese demand for oil to fuel the fastest-growing major economy in the world is expected to rise 3.4 percent this year, down from 15 percent last year, agency said in a report today. The country's appetite for crude is forecast to expand 7.5 percent in 2006, according to the agency, which advises 26 industrialized nations. Lack of Supply The supply needed to meet rising global oil needs will not be coming, according to the CIBC economists. Members of the Organization of Petroleum Exporting Countries have ``limited'' opportunities to boost output, and increases in Russian production appear to have reached a plateau, Buchanan said. OPEC pumps about 40 percent of the world's crude oil. Hurricane Katrina exacerbated the supply crunch by damaging platforms and delaying output from fields such as Thunder Horse, Atlantis and Tahiti, the report said. The Gulf accounts for about 30 percent of daily U.S. oil output and 24 percent of gas production. Royal Dutch Shell Plc, the biggest oil producer in the Gulf of Mexico's deeper waters, today said output from the Mars field and nearby sites may be shut for the rest of the year because of Katrina. Gulf of Mexico Outlook Hurricane Dennis a month and a half ago also did damage in the region. BP found its $1 billion Thunder Horse platform, the largest of its kind, listing at a 20-degree angle after Dennis swept through in July. The project, which was in the development stage, won't start pumping oil this year as originally planned, BP said. Instead of adding nearly 600,000 barrels of oil a day by 2007, new fields in the Gulf may contribute just 300,000, according to Rubin's report. ``When you juxtapose that with the apparent insensitivity of the demand curve, then what happens is that even though it's a relatively small reduction in supply, you need huge price increases to rein in demand,'' Rubin said during the interview. Global output will rise about 1.2 million barrels this year and 1.7 million in each of 2006 and 2007, the economists predicted. If demand rises 2.5 percent annually from 2005 until 2007, a shortfall will develop by next year, the report said. The economists reviewed government and other data and concluded a 10 percent increase in crude prices would reduce demand by 0.7 of a percentage point over three to four years, the report said. This figure is about half the rate used by the U.S. Energy Department in its estimates, the report said. ``You have had a very significant reduction in the growth of demand, something in the neighborhood of a 40 percent reduction in the growth of demand already,'' he said. ``Unfortunately it's taken huge prices to achieve that.''