Despite revising his 2008 Brent forecast from $86 per barrel to $93 due to financial demand being “stronger than anticipated,” Lehman’s Ed Morse noted that the case for such demand is not sustainable in the medium term.
Lehman’s 2008 West Texas Intermediate forecast remains at $93/bbl.
Morse cited a “phenomenal growth of investment money into commodities," in open interest for futures, options and in the over-the-counter market. Lehman estimates that index flows into the energy space have totaled around $40 billion this year to date, which equals flows for all of 2007, leading to its upward price revision for Brent.
In addition to demand from long-only funds, hedge funds and algorithmic traders, these new fundamentals include the Federal Reserve's recent rate-cutting actions and a weakening dollar leading to more money flowing into commodities, Morse said.
Yet there is a lack of evidence to show that such correlations hold over time, added Morse. Citing the fact that profit taking in the crude complex has increased over the past four weeks, he said that such investors may be discouraged from using crude as a hedge against inflation with the dollar forecast to rise against the Euro in the event of the European Central Bank cutting lending rates in the middle of 2008.
Morse noted that a “turning point “ for oil markets is coming due to crude becoming less of an effective hedge against the falling US dollar, a reduced outlook for global demand growth, growing inventory builds through 2009 and a series of longer term indicators which point to upstream and downstream supply response.
Lehman has revised its 2008 US demand growth from flat to -300,000b/d.
Morse noted that 2008 inventories should therefore build by 300,000 unless the Organisation of Petroleum Exporting Countries (OPEC) decides to cut output.
Weather risk during hurricane season as well as geopolitical tensions in Iran and Iraq may lead to spikes, he added.