The continued upward pressure on oil prices is driven by the demand for risk premium, due to supply worries and tension in producing countries, says Jadwa Investments Saudi investment services firm.
In their retrospective report for April 2011, Jadwa diverge from the opinions of both OPEC and the IEA, in stating that ongoing high prices are primarily an indication of investor and consumer worries about the unrest in the [MENA] region and the prospect for more supply disruption”.
In their recent reports using April data, OPEC said current oil prices are “in line with short term market fundamentals”, while the IEA said current prices were dues to a combination of “market fundamentals, geopolitical uncertainty and future expectations”.
The Saudi oil minister Ali bin Ibrahim Al-Naimi revealed in April that oil production was cut to an average of 8.3 million barrels per day (mbpd) in April from 9.1 mbpd in February, over concern that the market was oversupplied following disappointing growth figures in developed economies and the natural disasters in Japan, the Kingdom’s second largest import customer.
“While the physical position is comfortable, the very high prices indicate that a large risk premium has been attached to oil prices” says the Jadwa report. “This risk premium suggests that consumers and investors want a greater cushion of excess supply than they have historically needed”.
Jadwa believe that unless there are “clear signs of a decline in demand”, prices will remain high. The IEA stated in a recent governing board statement expressed “serious concern” that high oil prices are affecting the global economic recovery.
The Board stated there was “a clear, urgent need for additional supplies on a more competitive basis”. If supply increases to support fragile economies, demand may increase and place the oil price on a sustainable footing.
Jadwa raised their oil forecast prices to $101 per barrel for Brent and $93 per barrel for WTI, somewhat below the consensus view, as the firm expects regional tensions to ease, reducing the risk premium that they believe is currently inflating prices.
Jadwa also expect a slowdown in economic growth which will depress demand.
