The World Bank forecast in January that oil will drop 3% to $102 per barrel this year. It said supplies would be enough to accommodate moderate demand growth, that there would be further easing of financial tensions in Europe and also pencilled in increasing crude supply from the US and Canada.
The International Monetary Fund, in the World Economic Outlook released on 23 January, expected crude to decline 5.1% to around $100 per barrel on the back of a gradual recovery in global growth.
However, early indications fly in the face of these forecasts. Since the beginning of this year, crude prices have started rallying again amid growing demand from China and Japan, and tensions in the Middle East and Africa, causing some analysts to revise their forecasts.
Brent crude touched a nine-month high of $119.17 per barrel on Friday last week on expectations of a faster recovery in major economies such as China and Japan. Brent was trading at $118 per barrel on Tuesday, up 6.3% year-to-date on the International Commodities Exchange.
Demand for crude from China rose 7.4% to 5.92 barrels per day in January, ahead of the Lunar New Year holiday. China wants to enhance its energy security and is targeting $1 billion barrels per day of reserves in the next five-seven years, said Vijay Bhambwani, commodities analyst and CEO of BSPLindia.
Japan, on the other hand, is more likely to rely on fossil fuels after the Fukushima disaster in 2011.
“After China, Japan is the third-largest importer of oil and the unlimited monetary easing will lead to higher crude consumption there,” said Kunal Shah, head of commodities research at Nirmal Bang Commodities.
According to Japan’s ministry of economy, trade and industry, crude shipments to the country rose 3% to 212.5 million kilolitres last year to cover the shortfall in nuclear power generation, the most in nine years, Bloomberg reported 31 January.
The rise in demand in 2013 has come at a time when the Organization of the Petroleum Exporting Countries (Opec), which accounts for 40% of world production, has decided to cut output.
Production from Opec fell marginally to 30.45 million barrels per day in January from 30.65 mbpd in December. Even Saudi Arabia reduced output from 9.45 million mbpd in December to 9.25 mbpd in January, the lowest since May 2011, according to a 7 February Platts release.
Moreover, geopolitical tensions in the Middle East and Africa will continue to weigh on Brent crude. There is a threat of further terrorist action in Algeria and Libya is struggling with post-civil war reconstruction. A war between Sudan and South Sudan has disrupted crude exports from there.
Western Texas Intermediate crude on the New York Mercantile Exchange rallied 5.6% to $96.92 per barrel, but is likely to underperform Brent because of the glut of oil at Cushing in the US. Domestic transportation issues in the US have prevented oil from freely flowing to the Gulf coast, said analysts.
There are clearly upside risks to the IMF and World Bank forecasts. While WTI crude will remain depressed, some analysts expect Brent to surpass $120 per barrel this year if global growth accelerates at a faster pace and tensions in the Middle East and Africa continue. Rising crude prices don’t bode well for India, especially at a time when the country is grappling with twin deficits.