Oil Market Must Endure Risk Premium For 'At Least' Rest of the Year: ANZ

More fodder for the oil bulls but bad news for Main Street consumers. Australia's ANZ Bank raised its second quarter forecasts for benchmark Brent crude and U.S. oil futures, citing continued risk of supply disruption from the Middle East and North Africa as political unrest in the region shows little sign of abating.


Although some quarters of the oil market are growing weary of the geopolitics as a driving force for oil prices - some even referring to 'Libya fatigue' - ANZ says the unrest means that the geopolitical risk premium will stay for at least the rest of this year.

Serene Lim, ANZ's Singapore-based Oil Strategist, estimated the implied risk premium for Brent crude at around $15 to $20/barrel.

"Oil & gas production will remain constrained, with security of supply providing support for prices," Lim and Head of Commodities Mark Pervan wrote in an Energy Update released Wednesday. "Until the situation is resolved, the oil market will continue to exhibit risk to the upside."

ANZ forecast U.S. crude futures to average $118 a barrel in the second quarter, up 20 percent from the previous prediction of $98/barrel. Meanwhile, the Bank raised its 2Q Brent crude forecast 28 percent to $128/barrel from $100/barrel earlier. ANZ is slightly bearish for third quarter, calling for U.S. crude futures to drop modestly to $117/barrel and $126/barrel for Brent, as seasonal demand slows.

On the supply side, ANZ warned OPEC's spare capacity may be stretched as it steps in to plug supply shortfalls from Libya now and possibly other regional producers in the future. De facto OPEC leader Saudi Arabia has already ramped up production from 8.3 million bbl/day to 11.7 million bbl/day, ANZ said.

"With continued unrest expected for the rest of 2011, the key OPEC producers will have to continue to keep production at elevated levels to make up for lost production elsewhere." The Bank forecasts a steep decline in OPEC crude oil spare capacity this year to offset lost production capacity in the Middle East North Africa (MENA) region.

Economic recovery gathering momentum in the U.S. will also contribute to higher prices, ANZ said. Friday's stronger-than-expected U.S. payrolls report gave investors reason to believe that the recovery is gaining traction. Nonfarm payrolls rose by 216,000 in March as the private sector added 230,000 jobs, the U.S. Labor Department said in its survey of employers.

Others are not so optimistic about the economic outlook. Should oil prices remain stubbornly in the triple-digits, some economists warn that may derail the recovery and even cause a slide back to recession.

That's why ANZ temper their outlook with a cautionary note on the risk of reversal "as speculators may unwind net long speculative positions and risk appetites suffer if growth expectations are revised down. Other commodity prices may be vulnerable to corrections under such an environment."

A clear theme building amongst oil analysts is that emerging market consumption will continue to support demand, picking up the slack when developed world demand falters. ANZ expected oil demand growth of 1.8 percent this year and the next, "driven largely by emerging markets."

Although further monetary tightening in emerging economies to curb inflationary pressures is a downside risk, "the growth rate is off a high base level and still on track," ANZ said. "Asia product demand will remain strong as Japan draws on gas oil and fuel oil for reconstruction."