Oil prices to ease in second-half

Crude oil prices are expected to fall to an average of $108 a barrel in the third quarter, a Reuters poll showed on Thursday, as analysts expect current highs around $124 to dent demand and economic growth. While analysts increased their forecast by around $5 a barrel for the second quarter from a poll last month, oil is still expected to fall over the next two quarters.
Worries that strong oil prices could dent a fragile economic recovery returned to the fore after Standard & Poor's warned that the United States could lose its rating. Disturbances in the oil-producing regions of the Middle East and North Africa have powered four months of bullish price increases. "In our base case, prices remain elevated in the second quarter this year but correct downwards in the second half, as prices start to impact demand and markets appear oversupplied." Credit Agricole CIB analyst Christophe Barret said.
"We have Brent prices returning to $85 a barrel in the second half of 2011." According to the analysts polled, Brent will average $108.16 a barrel in 2011, compared with last month's forecast of $104.57 a barrel. From an average $113.99 a barrel in the second quarter prices are expected to fall to $107.96 a barrel in the third. US crude oil will average $98.92 a barrel this year, up from a forecast of $96.73 in the March poll.
For the second quarter, prices will average $104.63 a barrel from $99.84 a barrel; while on the third quarter they will average $100.81 a barrel from $98.53 a barrel. Brent was trading at about $124 and US crude was just below $112 on Thursday. "We continue to expect that there will be no further disruption to oil supply despite the ongoing political uncertainty in North Africa and the Middle East," said Caroline Bain from the Economist Intelligence Unit.
"This will mean that the risk premium in the market will start to fade in the second half of 2011," adding that the strong prices could lead to some rationing in the first half of the year. Analysts expect the geopolitical price premium associated with potential disruptions in other oil producing countries in the Middle East and North Africa (MENA) could wane, bringing crude futures back towards $100 a barrel.
"Risks are still skewed to the upside but if price gains pick up pace and remain at lofty levels for prolonged periods, the ultimate impact should be dampening demand and subsequent downside oil price corrections," Daniel Hwang from Gain Capital said. According to LBBW analyst Frank Schallenberger, there is still a "massive" premium of around $20 a barrel because of the political tensions in the Middle East. "I consider this premium to be something around $20 a barrel. Should the political tensions vanish, prices will fall back to $100," Schallenberger said.
Some analysts believe that talk of demand destruction could seem premature for now, although data from MasterCard shows the recent strong prices at the pump in the United States of around $3.81 a gallon saw retail demand for gasoline fall 1.6 percent last week on a year-on-year basis. "Outright prices are due for a downwards correction as fears of demand destruction take their toll and the novelty of the Libyan intervention wears off," JBC Energy said.