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Analysts turn bearish on oil prices amid sluggish economy

Analysts are lowering their oil price forecasts for this year on expectations of ample supply, weak demand and a sluggish global economy

ABN AMRO was the latest to cut its price forecast. The bank expects Brent prices to fall from an average of $112 a barrel in the first quarter of 2013 to around $105/b for the rest of the year.

Prices for both Brent and WTI will tumble in the second quarter of 2013, ABN AMRO said, to $90/b and $80/b respectively. Prices, though, are expected to recover in the second half of the year. Demand should pick up in the summer, and supply worries and geo-political tensions could intensify boosting prices, the bank said in a note on 25 April.

ABN AMRO sees prices trending lower over the next couple years. Brent is forecast to average $100/b in 2014, and could be as low as $90/b in 2015. WTI is seen declining from an average of around $94/b in the first quarter of 2013 to around $90/b for the rest of 2013 and 2014. WTI could fall as low as $85/b in 2015, the bank said.

Goldman Sachs, which has long been bullish on oil prices, has also cut its Brent price forecast. It has lowered its short-term outlook from $110/b to $100/b and its full-year average forecast for 2013 from $110/b to $105/b.

Analysts at Bank of America Merrill Lynch (BoAML) are not quite as bearish. BoAML said in a 25 April research note that it expects Brent to fall below $95/b in the short-term, but prices should bounce back to average around $110/b for 2013 and $112/b for 2014, the bank said citing low OECD stocks.

“The biggest swing factor for Brent could be the return or further loss of Iran’s idled oil output,” the bank said in a note. “Still, we see a natural cap to Brent prices of $140/b in 2013, the point at which energy as a share of GDP reaches 9%.”

BoAML said surging shale-oil output combined with refining and export constraints would keep WTI prices supported at around $90/b in 2013, and $92/b in 2014. The bank said, however, there is a risk that WTI could plunge to just $50/b over the next two years because of increased US crude output.

The International Energy Agency (IEA) attributed the recent fall in oil prices to renewed pessimism about the global economic outlook, weaker crude demand and “exceptionally deep seasonal maintenance at refineries” during the first quarter of 2013.

In April, the IEA lowered its global oil demand forecast for 2013 to 90.6 million barrels a day (b/d), driven by a 480,000 b/d drop off in OECD demand. The majority of this decline, around 340,000 b/d, was expected to be in Europe.  

Sustained weakness in the eurozone has leading economists questioning the region’s economic strategy of austerity. Spending cuts, many economists argue, have blunted growth across Europe, especially in the region’s more troubled economies such as Greece, Spain and Italy. Spain’s unemployment rate has soared to over 27%, up from around 8% before the financial crisis.

Last week, the International Monetary Fund's chief economist, Olivier Blanchard, told UK chancellor George Osborne to rethink his austerity plans because they were threatening economic recovery. The pressure on Osborne may ease somewhat now that the country has narrowly averted a triple-dip recession. But economic growth remains anaemic, with the country reporting a modest 0.3% GDP growth rate in the first quarter of 2013, compared to the fourth quarter of 2012.

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