BMO Financial Group - Outlook 2005(1.1Mb pdf File) - Boardwalk REIT

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Russia also has the market concerned that
restructuring of that company and the process
of ownership change could disrupt close to one
million barrels per day of production. The
market is also worried about the possibility of
an overthrowing of the Saudi government by
strongly anti-western factions. All of these risks
have made the market very nervous about
supply adequacy, adding a very large premium
to oil prices – which has bounced about in the
US$10-$20/barrel range during the past couple
of months.
At their current level of close to US$53/barrel
(October 8), oil prices incorporate a risk factor
estimated at $18/barrel. Some sources of risk
have been diminishing. The apparent
resolution of the presidential recall in
Venezuela in favour of Chavez has reduced
that source of supply risk for the time being.
Additionally, the market is attaching a lower
probability that the Yukos affair will significantly
disrupt production and exports in Russia, even
though the company, unable to pay
transportation fees, had to suspend a small
amount of exports to China. However,
Hurricane Ivan’s substantial damage to oil
producing infrastructure in the Gulf of Mexico
and recent indications that rebel actions
against the Nigerian government could intensify
have maintained a strong bid in the oil market.
In Nigeria, oil production has been running
around 2.4 mmb/d.
Looking ahead, we expect the risk premium to
diminish gradually during the next couple of
years. Notwithstanding recent developments,
risk related to Yukos production and exports is
likely to be eliminated within the next few
months. While risks to Iraqi production and
exports are likely to remain pronounced, they
are projected to diminish gradually as some
progress is made on the political front and the
new regime’s operating experience increases.
Looking at the market fundamentals, current
high prices and raised expectations about
longer-term prices have greatly improved the
economics of existing projects and are likely to
stimulate new exploration, development, and
production globally. Production in the Former
Soviet Union and Africa is growing at a brisk
pace, Saudi Arabia and other countries in the
Gulf are investing to expand their capacity, and
tar sands production in Canada is rising. High
prices are also likely to rein in consumption,
which responds with lengthy lags. Thus, there
should be fairly well balanced market
conditions during the next few years, although
there could be some tightness this winter.
Based upon IEA estimates and assuming
OPEC continues to produce at its current level,
global supply of oil would rise by 1.9 mmb/d to
85.0 mmb/d in 2005. A large part of that
increase would emanate from the Former
Soviet Union (rising 0.6 mmb/d in 2005
following average increases of 0.9 mmb/d
during the past two years) and OPEC (also up
an estimated 0.6 mmb/d). Output in non-OPEC
Africa is slated to rise 0.4 mmb/d next year.
The expected increase in global supply next
year should be more than sufficient to meet
rising consumption, which is expected to run at
83.9 mmb/d, and add to global inventories.
Overall, we expect the price of WTI to decline
from current levels to an average somewhere
in the range of US$33-US$38/barrel in 2005
and US$28-$33/barrel in 2006. Average prices
during the next couple of years would be at the
lower end of those ranges if the current turmoil
in Iraq diminishes. Given unsettled political
conditions in several oil producing regions and
the oncoming winter heating season, progress
towards lower prices is likely to be bumpy.
Given very tight margins of excess capacity,
unexpected shocks on the supply or demand
sides could lead to substantial price volatility
during the next couple of years.
Earl Sweet, Assistant Chief Economist
416-867-4823
earl.sweet@bmo.com