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Upside in Oil Capped; Brent Could Fall $15: Analyst

CNBC.com
Sunday, 13 Nov 2011 | 10:58 PM ET

Crude oil prices extended last week’s strong gains in Asia’s trade on Monday, but some analysts are skeptical of further upside for the commodity in the long run as global growth slows.

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Dominic Schnider, Head of Commodity Research at UBS Wealth Management, expects a 500,000 barrel reduction in global crude oil consumption next year as demand from Europe and China wanes.

"The market is not taking into consideration adequately the risk of weakness on the demand side, it all hinges on lower economic growth," said Schnider told CNBC on Monday.

Nymex crude inched higher towards $100 a barrel on Monday, extending last week's 5 percent gain; while Brent crude rose to $113.40, after last week’s 2 percent gain. Markets were encouraged by strong U.S. consumer sentiment data and improving headlines from Europe boosting hopes of a resolution to the region’s debt crisis.

Schnider says prices may continue to be supported in the near term by the concerns over Iran’s nuclear ambitions and falling U.S. inventories, but the slowing global growth story will eventually result in a pullback in prices.

"We have a good chance to see a draw-back of probably $15 (for Brent)," he said.

Jerry Lou, Chief Strategy Officer at Morgan Stanley Huaxin Securities also believes a weak global economy is likely to put a cap on oil prices. "I don't believe (Nymex) oil has a lot more to run above $100, and that's basically a function of global growth - if you look at the U.S. and Europe's economic environment, it sounds very unlikely we are going to get much further than $100," Lou said.

Supply concerns are also easing with more Libyan oil coming on stream. The country has boosted crude production to 600,000 barrels per day (bpd), and is expected to add another 200,000 bpd before the end of the year,

And despite rumblings from some OPEC members to slash oil output by 500,000 barrels per day, Schnider believes growth concerns will keep the cartel from cutting output at its upcoming December meeting.

"I think the market does not look at the fact that we are on track to see the 750,000 barrels supply increase towards the end of the first quarter," Schnider said.

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