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World oil prices could surge to $144/bbl

By Doris Dumlao
Philippine Daily Inquirer
First Posted 02:58:00 03/10/2011

Filed Under: Oil & Gas - Downstream activities, Middle East Africa - Africa, Unrest and Conflicts and War, Economic Indicators

MANILA, Philippines ? American investment bank Merrill Lynch sees global oil prices surging to $144 per barrel based on the Brent crude benchmark in the next three months given the political unrest in the Middle East and North Africa.

?Global oil demand has been expanding at a breakneck pace in recent quarters, and now the political situation in Libya has reduced oil production by one million barrels per day,? Merrill Lynch said in a commentary dated March 7.

To reflect the tighter oil market, Merrill Lynch adjusted upward its average Brent crude forecast to $122 per barrel from its previous estimate of $86.

The bank said prices could briefly break through $140 and hit $144 per barrel in the next three months.

For the average Brent crude price for 2011, Merrill Lynch said it would rise to $108 per barrel, up from its previous forecast of $88 per barrel.

The bank expects WTI (West Texas Intermediate), also known as Texas light sweet oil, to average $101 per barrel this year, up from its earlier forecast of $87.

The price of Brent crude is the benchmark for European economies while that of the WTI is used by the United States.

Dubai crude

Asian economies like the Philippines largely follow the price movements of the Dubai crude and the Mean of Platts Singapore (MOPS), the country?s benchmark for refined petroleum products.

Finance Undersecretary Gil Beltran on Wednesday said that the Development Budget Coordination Committee (DBCC) had assumed that Dubai crude prices would average between $80 and $120 per barrel.

Beltran said the DBCC, scheduled to meet next week to discuss macroeconomic targets, was not likely to downgrade growth goals.

In fact, Beltran said the government might even upgrade the official gross domestic product (GDP) forecast of 5 percent for 2011.

As of press time, the price of Brent crude was $112.86 per barrel.

Doubts over projections

An energy official and an executive of an oil firm expressed doubts over the bank?s projections.

Energy Undersecretary Jose M. Layug Jr. said he did not expect oil prices to reach those levels, especially after the International Energy Agency had declared that there were at least two million barrels of oil that could cover the shortfall in Libya?s output.

Layug said the public should ?not be worried about supply issues since much of what?s going on right now is highly speculative.?

He added that even the Organization of Petroleum Exporting Countries (Opec) had already announced that it was ready to fill up the gap, while Saudi Arabia had begun doing so last week.


Fernando Martinez, chair of Eastern Petroleum Corp., said the Merrill Lynch projections were ?alarmist.?

Martinez said it was difficult to determine the behavior of oil prices because these were highly volatile.

He noted that oil prices surged to $140 a barrel in July.

2008 but crashed to $40 a barrel before the end of that year amid a downturn in the global economy.

Economist Peter Lee U said the $144-a-barrel projection for crude was not ?justified on economic grounds? unless the unrest in Libya spilled over to other major oil-producing countries.

But even before the tensions in the Middle East and North Africa heightened, U said he had expected the average price of Brent and WTI to breach $120 a barrel by the end of the year.

?This is because basically of recovering economies in Asia, including the Philippines. I do expect oil prices to remain high, although not at the levels seen in 2008,? said U, dean of the School of Economics of the University of Asia and the Pacific.

Contagion effect

Merrill Lynch?s estimates assume Libya would stay mostly offline for six months, with a limited oil infrastructure damage, no further oil supply disruptions in the region and a modest drop in global demand. It assigned a 55-percent probability for this base scenario.

But the US investment bank said there was a 30-percent probability that oil prices would exceed its forecasts. It said additional oil disruptions could not be ruled out due to a contagion effect.

?For example, unrest in Bahrain is likely to increase the risk of social unrest spreading into Saudi Arabia or Iran,? Merrill Lynch said.

In the bank?s upside risk scenario, Libya remains offline completely for 2011 alongside a range of additional supply disruptions and a severe drop in demand. Brent prices could average this year between $125 and $160 per barrel under such scenario, depending on the supply loss.

?There are simply too many fronts open at this stage and a more severe oil disruption cannot be ruled out. As long-term strongmen Zine El Abidine Ben Ali and Hosni Mubarak were forced out of power in Tunisia and Egypt, a grassroots revolution in Libya has put the country on the verge of civil war. Yemen also seems rather unsettled, with some observers giving President Ali Abdullah Saleh a 50/50 chance of survival over the next few weeks,? Merrill Lynch said.

Best-case scenario

?In Bahrain, what appears to be a Shiite revolt against the ruling Sunni elite has resulted in extensive turmoil. Meanwhile, Iran is seeing internal problems of its own, with key opposition leaders being arrested in recent days,? it added.

In its best-case scenario in which Libyan supplies come back in a month and there is no further turmoil in the region, Merrill Lynch Brent prices should average $100 per barrel in 2011.

?We assign a probability of 15 percent to this scenario,? Merrill Lynch said.

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