Guinness sees 20% fall in oil price as demand dries up

International Energy Agency cuts 2011 forecast by 200,000 barrels and 2012 estimate by 400,000, although price not expected to collapse.

Fund managers at Guinness Asset Management have tipped the price of Brent crude to fall by as much as 20% after the IEA slashed its outlook for demand this year.

The IEA last week cut its 2011 forecast by 200,000 barrels and its 2012 estimate by 400,000, leaving overall growth at 1 million barrels per day for this year, and
1.4 million barrels per day next year.

OPEC also published a similar report forecasting sluggish growth over the next two years, prompting fears over weakening oil prices.

Signs of this slump in demand have already been feeding through into prices. Brent crude, which had recovered from $85 per barrel in November 2010 to a high of $125 in May, has started to decline recently and the commodity is now trading around $110.

Ian Mortimer, co-manager of the Guinness Global Energy fund, said demand cuts are unsurprising considering the uncertainties surrounding the global economy.

He said the group had forecast the oil price would weaken as a result of sluggish demand, and expects Brent to weaken from its current level back to about $80-$90. Guinness also sees WTI slipping from $90 down to as low as $70.

However, while the expected falls are sharp from here, Mortimer said the oil price will not return to credit crunch levels.

“There is the potential for the oil price to weaken but we do not expect oil to collapse to 2008 scenarios,” he said.

“Demand is showing signs of softening, but we see good growth in the non-OECD region, and we also have the backstop of OPEC,” he added.

He also expected oil cartel OPEC to intervene and protect the oil price at about the $85 to $90 level if it falls as forecast.

Energy markets were also impacted recently by the Libyan crisis, but the country has since signalled oil supply will be coming back on stream over the next six months.

At 2% of world production, Libyan oil represents a healthy proportion of global supply but, according to Mortimer, any supply disparities have already been levelled out by Saudi Arabia.

“When Libya went offline, the market lost 1.6 million barrels per day of supply. Now it looks like it will be back up to a million by mid next year. However, Saudi Arabia and Kuwait increased supply as a result and it is likely Saudi Arabia will pull back its supply as Libya returns to the market,” he said.