While oil prices stand about 50% below their July 2008 peak they significantly rebounded in recent months, with the price of Brent having risen by 75% between December 2008 and mid June. Falling oil supply was a major factor behind this development, with OPEC crude oil production in the first quarter 2009 having recorded the largest fall in 20 years. More recently, market sentiment that the slump in economic activity might bottom out soon and stronger Chinese crude oil imports, which increased by almost 40%, not seasonally adjusted, between February and March 2009, might also have played a role. While this may largely reflect restocking of strategic reserves at a period of relatively low crude oil prices, it also hints at some firming in Chinese economic activity in the near term.
The projections presented here are based on the usual technical assumption that the Brent price stays close to its level before the cut-off date for information, in this case $65 per barrel. But there are also some substantive arguments backing this assumption. Thus, relatively high spare capacity and crude oil inventories as well as subdued oil demand on account of weak macro-economic activity will contribute to keeping oil prices significantly below the elevated levels witnessed in the recent past. Moreover, conditional on the economic growth projections in this Economic Outlook, a simple model of demand and supply for oil, calibrated with reasonable values for price and income elasticities, suggests a price of around $50 and $55 per barrel Brent for this year and next, respectively (see graph). However, with high oil price volatility and considerable uncertainty about supply and demand actual oil price developments are subject to a large degree of uncertainty. In particular, there is a considerable risk that rising oil demand outside the OECD area, notably from China, in combination with OPEC supply restraint could put further upward pressure on prices. In addition, analysis by the International Energy Agency suggests that project delays will remain a major factor restraining oil supply in the medium term. More recent information suggests that project cancellations and slippage in upstream spending levels for 2009 appear to be increasing due to relatively low oil prices. Indeed, the oil futures curve suggests further price increases over the next two years. However, the predictive power of oil futures for spot prices is notoriously low.
Non-oil commodity prices have also increased
The downturn in world economic growth and more favourable seasonal conditions for agricultural production have also led to large falls in prices for minerals, ores and metals and for agricultural raw materials and food, respectively, from their peak levels in spring and summer 2008. However, prices for all important industrial metals have bottomed out and most of them have posted strong gains over recent months. Again, this recovery is in part attributable to rising Chinese imports, which for some metals reached record levels in March. Food prices have rebounded as well, reflecting strong Chinese import demand for grains, weather concerns and planting delays. Prices for non-oil commodities are assumed to stabilise around current levels. However the risk distribution appears to be skewed to the upside.
IEA (2008), Medium-term Oil Market Report, Paris
OECD (2009), OECD Economic Outlook, No 85, June
Wurzel, E., L. Willard and P. Ollivaud (2009), "Up and Down on the Oil Price Curve-Forces and Policy Issues", OECD Economics Department Working Papers, forthcoming.
©L'Observateur de l'OCDE n° 274, juillet 2009