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JPMorgan Raises Oil-Price Forecasts, Citing Supply Constraint

JPMorgan Chase & Co. raised its oil-price forecasts because OPEC and other producers aren’t matching rising demand and consumers will take time to react to higher prices.

The bank boosted its 2011 Brent crude forecast to $120 a barrel from $110, and changed its estimate for West Texas Intermediate crude to $109.50 from $99. Forecasts for 2012 prices were raised to $120 and $114, respectively.

“While financial bushfires or perhaps a rapid resolution to the Libyan civil war could radically alter market dynamics, the balance of both risks and fundamentals still points to a supply-constrained world,” JPMorgan analysts led by New York-based Lawrence Eagles wrote in a report yesterday.

Oil futures posted their biggest weekly decline since December 2008 last week amid concern about the pace of the economic recovery, with London-traded Brent plunging 13 percent to $109.13.

JPMorgan forecasts supply to fall short of demand by 600,000 barrels a day during the third quarter, even with the assumption that the Organization of Petroleum Exporting Countries increases output by 1.2 million barrels a day in coming months.

The gap could narrow to 300,000 barrels a day by the fourth quarter, assuming Saudi Arabia increases production to 9.5 million barrels a day, Angola to 1.7 million and Iraq to 3 million, though “that may prove a stretch,” the bank said. Output from those three OPEC countries in March was 8.66 million, 1.56 million and 2.69 million barrels a day, respectively, it said.

Supply Gap

Consumers draw on stockpiles when production fails to match demand. Still, “with inventories already below the five-year average, any supply gap will have to be balanced by lower demand growth, rationed by higher prices,” the New York-based bank said.

Next quarter there’s a risk oil may move toward record levels near $150 set in 2008, unless there’s a surprise increase in OPEC output beyond 29.4 million barrels a day or slower economic growth, the bank said. JPMorgan forecast Brent to average $130 and WTI $116 during the July-to-September period.

While the bank lowered its estimate of world demand by 100,000 barrels a day, in part because of the earthquake-led disruptions in Japan, it raised its forecast for Chinese consumption, saying data implies China’s crude-oil inventories have been “drawn heavily” in the past six months.

“We have observed a parallel destocking activity in the copper market,” JPMorgan said.

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