OREANDA-NEWS. October 09, 2009. We are initiating our coverage of the crude oil market, with Brent price forecasts of USD 85/bbl for 2010, USD 100/bbl for 2011 and USD 110/bbl for 2012. Our long-term forecast (2015+) is USD 90/bbl, based on the expected marginal cost of Canadian oil sands (now the world’s second largest oil reserves).

We believe the oil market will move back into deficit in 2010 as global GDP growth recovers to about 3% YoY, resulting in a 2.4% YoY increase in oil demand to 86.5mbpd. This is modestly higher than the latest IEA forecast of 85.7mbpd, and almost entirely due to our more positive view of growth in Asian demand. Additionally, we expect further deficits in 2011-12.

We forecast supply growth of 1.8% in 2010, largely due to our expectation of OPEC supply back to 30mbpd in 4Q10, up from 28.8mbpd in 4Q09. Non-OPEC supply is forecasted to rise just under 1%, in line with the latest IEA estimate.

In our view, oil prices will increasingly triangulate between supply-demand factors, investment/speculative demand, and long-term marginal costs. We believe this will accelerate price discovery as forward-looking investors become as important as supply-demand in determining market direction. As the debate about potential supply shortages and peak oil is re-ignited, we believe it will be a powerful force in driving oil prices back above USD 100/bbl and towards the 2008 peak.

The key risks to our outlook are a slower than expected recovery in global GDP growth, with constrained bank lending and highly indebted US/OECD consumers refusing to spend and providing increased headwinds for oil prices. Furthermore, a sooner-than-expected increase in OPEC supply, or a large slippage in OPEC compliance, could reduce our price expectations.