[click graphic to enlarge]In a report published on November 26, 2008 Merrill Lynch commodity strategist Francisco Blanch (along with some of his cohorts) lowered his average 2009 crude oil price forecast to $50/barrel. He also forecasts a dip in global oil demand of 400,000 b/d or 0.5% in 2009. Blanch notes that the chief downside risk to his forecast would be a downward revision in Merrill Lynch’s GDP growth prediction for China which stood at 806% at the time of this report. Conversely, the chief upside risk to Blanch’s scenario could arise from “excessively loose fiscal and monetary policies around the world.”
Operating costs for oil companies are low, and will not provide much price support above $30/bbl
[click graphic to enlarge]Blanch expects oil prices to bottom around 1H2009 as producers cut back production, the reactive shock to slowing economic activity starts to fade and seasonal demand eases. As economic activity in OECD countries moderates and starts to bounce back, Blanch sees a rebound in oil prices in the second half of 2009. “In line with this view, we expect WTI crude oil prices to average $43/bbl in 1Q and $45/bbl in 2Q09. Thereafter, we see prices averaging $56/bbl in 2H09 and $70/bbl in 2010.”
Blanch forecasts a marked demand decline for oil in OECD Europe and North American in 2009. However, he sees an increase in oil consumption in the Middle East, Latin America and Africa. In the Asia-Pacific region, he sees demand decreases in Japan and Korea counter balancing the demand increases in China. On a product basis, Blanch sees “RBOB gasoline spreads staying very weak, while we expect middle distillates to hold up better. On aggregate, we expect a large surplus of light products of 1.1 million b/d, a surplus of residual fuels and other products of 930 thousand b/d, and a surplus of distillates of just 164 thousand b/d.”
US natural gas prices have fallen, and remain substantially decoupled from UK and Asian gas prices
[click graphic to enlarge]With regards to US Natural Gas, Blanch believes writes that “US industrial and electricity gas demand could continue to soften.” Additionally, with the large increase in LNG supply ahead, he lowers his 2009 US natural gas average price forecast down to $6.00/mmBTU, from $8.50.
Global coal prices have further to fall as the market is increasingly oversupplied
[click graphic to enlarge]Since their peak in early July 2008 European API-2 coal prices had slipped by 65% and stood at $78.50/mt compared to $118.75/mt in January. Blanch reckons that European API-2 and South African API-4 coal prices could fall again due to the deteriorating global economy and as the seasonal inventory build in 4Q comes to an end, with the contango in API-2 and API-4 increasing further. The main risks to Blanch’s views are a very cold winter and large unexpected coal supply disruptions.
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