Strong demand in emerging markets has set the stage for another runup in oil prices as producers struggle to make up for the loss of Libyan exports.
Without an increase in production from the Organization of Petroleum Exporting Countries, demand will exceed supply in the latter half of 2011, and influential analysts predict that crude prices will return to the peak levels of earlier this year.
Higher prices are a boon for Canadian oil producers but are being blamed for a shift in consumer spending as households around the world spend more of their discretionary income to fill up their fuel tanks. Some observers, including the International Energy Agency, which represents industrialized countries, have consistently warned that high crude prices threaten to derail the global recovery.
Even an increase in OPEC production may not be enough to prevent rising prices, as investors will then focus on lack of spare capacity among the cartel's producers, and the fact that most additional production would be heavier crudes that cannot be processed by many of the world's refineries.
"As inventories and spare capacity fall, prices will need to move higher to limit demand," Hussein Allidina, a commodity economist with Morgan Stanley, said in a report Tuesday. Morgan Stanley raised its 2011 and 2012 targets for Brent crude to $120 (U.S.) a barrel and $130, respectively, from $100 and $105.
But while oil demand is stagnant to falling in North America and Europe, it continues to climb in China, Latin America and the Middle East, reflecting higher growth rates and rapid industrialization.
China reported its oil consumption in April was 9.2-per-cent higher than in April, 2010, down slightly from the March pace but still a sharp increase, given that Beijing has allowed retail fuel prices to rise dramatically.
"Demand for crude has slowed a bit in India but it hasn't slowed as of yet in China," Patricia Mohr, vice-president and commodity economist at Bank of Nova Scotia, said Tuesday. "And the emerging world is key to any strength in commodity prices internationally. All of the growth in oil demand is in emerging markets.
Oil prices jumped Tuesday after Morgan Stanley and Goldman Sachs Group Inc. both raised their price forecasts for the North Sea Brent crude traded in London.
Brent - which has become the benchmark for light crude on world markets - climbed $2.43 a barrel to $112.53. The North American benchmark, West Texas intermediate, rose $1.89 a barrel to $99.59.
Consumers have been counting on some relief at the pump since crude prices began to slide two weeks ago amid signs of slowing growth in the United States, and the anticipated end of the U.S. Federal Reserve Board's extraordinary easing, which has pumped huge amounts of liquidity into the system.
On Tuesday, both Morgan Stanley and Goldman said any relief would be short-lived. They noted the continued demand growth in the emerging markets, and uncertainty over the willingness - or even ability - of OPEC to significantly increase its production.
Goldman Sachs - which often sets the tone for oil market traders - said it had raised its target for North Sea Brent to $120 (U.S.) at the end of 2011 from its previous forecast of $105, and had increased its 2012 price target to $140 from $120.
"While near-term downside risk remains as the oil market negotiates the slowdown in the pace of world economic growth, we believe that the market will continue to tighten to critical levels by 2012, pushing oil prices substantially higher to restrain demand," the Wall Street bank said in a client note.
Other OPEC producers have said there is no need to make up for the loss of 1.6 million barrels a day of Libyan exports because markets remain well supplied. With the recent pullback, the pressure on the cartel to boost production at its June 8 meeting will have eased.
But Morgan Stanley's Mr. Allidina said OPEC will need to increase its output soon, as demand will outstrip supply. Without a response from OPEC, the gap could grow to three million barrels a day by September, and four million barrels a day by the end of the year, he forecasted.
However, the cartel faces real challenges in filling that gap because it requires major investment to boost its real productive capacity and because much of the additional crude will be a heavier grade that European refineries - which rely on Libyan crude - cannot process.