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IMF: Oil Prices to Jump 10% on Supply Fears, Strong Demand

Tuesday, 17 April 2012 01:15 PM

Oil prices will gain 10 percent on average in 2012 compared with a year earlier on possible supply disruptions and more demand, the International Monetary Fund said. Non-fuel commodity prices will decline 10 percent.

The oil estimate compares with a January forecast for a 4.9 percent drop and assumes a price of $114.71 a barrel, based on the average of Brent, Dubai and West Texas Intermediate crude, the Washington-based IMF said today in a report. It raised its outlook for non-fuel commodity prices from a 14 percent drop in January. The global economy will expand 3.5 percent this year, revised from 3.3 percent previously.

Crude reached the highest price since May last month amid speculation that Western sanctions aimed at halting Iran’s nuclear program will disrupt Middle East shipments. The U.S. and its allies say Iran is seeking the capability to make an atomic bomb. Iran says it’s conducting research for civilian energy and medical purposes. Commodities climbed 5.2 percent and global equities gained 8 percent this year amid signs of growth in the U.S., the world’s largest economy.

“Iran-related risks are the biggest concern,” the IMF said. “Geopolitical risk is unlikely to subside soon; this risk has increased precautionary demand for oil inventories. Activity-related oil demand growth is also likely to strengthen as the recovery in global activity advances.”

Strait of Hormuz

Iran, the second-largest producer in the Organization of Petroleum Exporting Countries, has threatened to block the Strait of Hormuz, the transit point for about 20 percent of the world’s crude, in retaliation against economic sanctions. Military conflict or attempts to close the route would pose a “risk of a large-scale, possibly unprecedented, oil supply disruption,” the IMF said.

There are “doubts” about the sustainability of the commodity boom that began about a decade ago, and inventory levels in China are a “concern,” the IMF said. Inventory demand accounted for much of the increase in China’s commodity consumption in 2009 and early 2010, it said.

The IMF said recent estimates were for the country’s total copper stockpiles, excluding holdings in exchange-bonded warehouses, are about 1.78 million metric tons. That’s about 9 percent of last year’s total annual production, it said.

“Risks of a transition to less commodity-intensive growth do not seem imminent,” it said. “Industrialization, urbanization, and income convergence in emerging and developing economies will remain important sources of commodity demand growth.”

Food Risk

While an index of 55 food items tracked by the United Nations’ Food & Agriculture Organization dropped 9.3 percent from its February 2011 record, food prices climbed for a third consecutive month in March. Global food inventories remain “significantly” below the average over the past four decades in terms of stock-to-use ratios, the IMF said.

The La Nina weather pattern, which brings drier weather to South America and heavier rainfall in Asia, is the most prominent risk to food supply and the return of the pattern this year has been “unexpectedly powerful,” according to the IMF. Soybeans are most at risk because of their concentrated production in Argentina and Brazil, it said.

A large increase in the harvested rice area in Asia means supply will grow and prevent a decline in inventory buffers, the IMF said.

“Global demand continues to grow at a robust pace, and vulnerability to adverse weather events and other adverse supply shocks remain a concern,” the institution said.

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Tuesday, 17 April 2012 01:15 PM
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