Several major banks cut sharply their oil price forecasts on Tuesday, with Citigroup saying that even if the United States printed more money, oil would stay depressed by weak economic growth and fresh supplies from Libya.
Citi said it now expected Brent crude to trade at $95 per barrel at the end of 2011 and to average $86 in 2012. Citi had Brent averaging $105 for 2012 in the latest monthly Reuters poll. On Tuesday Brent traded above $108 a barrel.
The main risk is further deterioration in global growth expectations, caused by turmoil in Europe, slowdown in China or recession in the U.S., Citi said in a note.
If this (quantitative easing) were to happen, we believe it would be in response to still weaker growth numbers and that these would overwhelm the monetary boost, Citi added.
The U.S. bond buying programme otherwise known as quantitative easing has boosted most commodity prices by pulling down the value of the dollar.
U.S. Federal Reserve Chairman Ben Bernanke's speech on Friday at an annual central bank conference in Jackson Hole, Wyoming, is the most anticipated event for financial markets this week as they look for hints about further monetary stimulus.
The U.S. economy is limping along, and earlier this month the Fed's policy-setting panel signalled it would keep interest rates near zero for the next two years to help out.
HIGHER OIL PRICE DAMAGE
Olivier Jakob, oil market consultant at Petromatrix in Zug, Switzerland, said he believed that, unlike retail investors, professional investors do not generally expect Bernanke to announce another round of quantitative easing.
If no QE3 is announced and the Fed goes no way towards suggesting that another stimulus package is in prospect, then we could get a sell-off, he said.
Analysts from HSBC said in a note hopes of economic recovery were diminishing and that printing money was no longer an answer in a world of structurally weak growth.
The West's ability to shrug off economic shocks has dropped alarmingly. Higher oil prices earlier in the year did far more damage than usual, largely reflecting the ambient noise of deleveraging, HCBC said.
Economies typically enjoy some flexibility in dealing with oil price shocks. If credit markets work well, households can borrow to offset a squeeze in real incomes. If they're working less well, governments can borrow on behalf of households and support real incomes via a tax cut. These sources of flexibility may no longer exist, HSBC said.
BULLS STICKING TO GUNS
Goldman Sachs, traditionally one of the biggest bulls in the oil market, also said on Tuesday it might have underestimated the amount and speed at which Libyan oil would return to the market but added it was not yet changing its price forecast.
Goldman said it had initially assumed that Libyan production would average 250,000 bpd next year, but an end to its civil war may boost that figure to 585,000 bpd or a third of what the African country was producing before the war.
(It) would push back the timing on the drawdown of OPEC spare capacity by about three months, said Goldman, which has long said the oil producing group might fail to cushion fresh supply shocks because it has nearly run out of spare capacity.
BNP Paribas said it had cut its 2012 average for U.S crude by $10 to $107 a barrel and by $4 to $124 a barrel for Brent.
Expected future U.S. dollar weakness as well as the pursuit of accommodative monetary policy through low interest rates, or credit easing, remain strong supportive factors for the price of tangible assets, said BNP's Harry Tchilinguirian.
Morgan Stanley said that it saw a $4 a barrel downside risk to its $120 oil price forecast for 2011 if Libya produced 300,000 bpd by October and no downside risk at all if Libya pumped at full pre-war capacity by the end of 2012.
One mitigating factor lost in the Libya discussion is how rebels' success may embolden protesters in other Middle Eastern countries. As we saw in March, any evidence of increased instability in the Middle East is likely to create uncertainty and drive crude higher, Morgan Stanley said.