Barclays Raises 2008 Crude Oil Forecast

Barclays Raises 2008 Crude Oil Forecast to $116.90
By Christian Schmollinger and Sophie Tan
May 8 (Bloomberg)

Barclays Capital raised its forecast for U.S. crude oil prices this year by 16 percent, citing stronger demand from China and the Middle East and declines in production at non-OPEC countries.

Barclays increased its average estimate for West Texas Intermediate, the physical grade for oil futures traded on the New York Mercantile Exchange, to $116.90 a barrel from its previous prediction of $100.80.

``Non-OPEC supply remains weak and continues to under perform dramatically relative to consensus expectations,'' Barclays said in a May 7 report, led by commodity research analyst Paul Horsnell.

China, the world's fastest-growing major economy, has more than doubled oil use since New York crude dropped to this decade's low of $16.70 a barrel on Nov. 19, 2001. Record prices have failed to stem rising consumption in developing nations.

Crude futures for June delivery in New York rose $1.69, or 1.4 percent, to settle at $123.53 a barrel yesterday, the highest close since trading began in 1983, on signs that the U.S. economy is improving and may spur energy demand.

``We are in a phase during which the nature of the fundamentals is being revealed by the ascent of prices,'' the report said.

Supply Response

The supply response from oil-producing nations outside of the Organization of Petroleum Exporting Countries has been weak, with Russia ``having been added to the already-significant list of supply disappointments,'' the report said.

The drop in oil demand in the 30 developed nations, including the U.S., Japan and Germany, represented by Paris- based Organization for Economic Cooperation and Development ``has not been consistently large enough to bring global demand growth much below 1 million barrels a day,'' the report said.

``Non-OECD demand growth remains robust, most particularly China, Middle East and India,'' Horsnell said. ``The decline in OECD demand started in 2005 hasn't accelerated significantly.''

Alternative energy sources aren't being developed fast enough to stop fossil fuel prices from going higher and Barclays estimates the new investment flow into commodity indexes during the first quarter is $2 billion, which has gone mostly into agriculture and precious metals, not energy, the report said.

``Biofuels look set to be smashed against political rocks, oil sands lack scale and are being enveloped in carbon and other issues,'' the report said. ``There is no evidence for the price rise this year being due to speculation, exchange rates or flows of funds into commodities.''

The push to increase biofuel usage as a means to reduce carbon emissions has driven prices for staple foods such as rice and wheat to records as farmers convert more land to grow palm and soy beans to benefit from government subsidies.

Global food prices rose 57 percent in March from a year earlier, according to the United Nations. The World Bank says civil disturbances may be triggered by rising food prices in 33 countries. Rice, the food staple for half the world, has more than doubled in the past year.