Crude price to stabilise this year, fall sharply in '04

economictimes.indiatimes.com ECONOMIST INTELLIGENCE UNIT ECONOMICTIMES.COM[ TUESDAY, FEBRUARY 04, 2003 03:26:41 PM ]

The Economist Intelligence Unit's price index for hard commodities — industrial raw materials (IRM) — is forecast to continue 2002's slow recovery over the next two years, with gains of 4 per cent in 2003 and 5.4 per cent in 2004. However, crude oil, which is excluded from the IRM index as it would dominate movements in the trade-weighted measure, is forecast to see its price stabilise in 2003 before falling sharply in 2004.

"Having been inflated, initially by fears of a US-led attack on Iraq and then by supply disruptions in Venezuela, crude oil prices will be softening by mid-2003," said Matt Parry, senior commodities editor at the Economist Intelligence Unit. "This reflects a dismantling of the war premium — assuming a resolution of the crisis — and a reassertion of a global oversupply of oil on market sentiment. In this environment, weakly reviving global demand will be outweighed by higher supply as OPEC scrambles to reclaim lost market share. The net effect will be an average price for dated Brent Blend of $24.5/barrel in 2003, falling below $20/barrel in 2004."

Having recovered somewhat from 2001's price crash, when the IRM index fell nearly 10 per cent, some hard commodity prices have firmed in 2002. Higher prices for wool, natural rubber and nickel (the only base metal to rise) offset lower prices for cotton and most base metals (which continued their two year decline). Although the IRM index will recover in 2003 and 2004, EIU has downgraded the price forecasts for natural rubber and fibres.

A closer look at the quarterly pattern for prices across the IRM index highlights some interesting findings. Prices are forecast to stabilise in the first quarter of 2003, before falling in the second and third quarters, as the US-led showdown with Iraq softens demand in many key hard commodity markets. Prices will recover from the fourth quarter of 2003, picking up a strong head of steam as the IRM index rises uninterrupted through to the first quarter of 2005. Indeed, this one-and-a-half-year period is unique in many respects as all three key segments of the IRM index (natural rubber, fibres, and base metals) rise unabated on a quarter-on-quarter basis.

For specific commodities, the Economist Intelligence Unit's current expectations are as follows:

Aluminium: Continued over-investment in production capacity will mean the aluminium industry remains plagued by oversupply over the next two years, driving prices down.

Copper: The modest global economic recovery, producing stronger copper demand and contributing to lower stock levels, will provide steady support to prices throughout 2003 and 2004.

Crude oil: Crude oil prices will remain high while the threat of a US-led attack on Iraq persists, before falling once more, as artificially high prices in 1999-2002 have led to massive over-investment which will severely test OPEC's market power.

Fibres: Higher cotton consumption, in both 2002/03 and 2003/04, in comparison with present production forecasts is certain to reduce cotton stocks, driving prices up. Wool prices will remain high over the next two years as undersupply persists.

Lead: Lead prices will rise, albeit slowly, over the next two years, as the forecast recovery in demand slowly overtakes supply.

Natural rubber: The demand upturn in early 2002 proved short-lived; although prices are forecast to rise in 2003 and 2004, EIU take a more bearish view of prospects than it did in October's report.

Nickel: Prices will fall slightly over the next two years as additional capacity comes on stream in 2004.

Tin: From an excessively low level in mid-2002, prices will rise through 2003 and 2004, under pressure of recovering demand. EIU takes a more bullish view of price prospects than in the October report.

Zinc: Zinc prices will rise from mid-2003 through 2004, as strong demand growth increasingly diminishes the market's recent over-supply.