View of the Day: Oil prices are too high

An oil price at $80 a barrel is inconsistent with supply and demand dynamics, inventory levels and the current macroeconomic environment, says Alexander Redman, strategist at Credit Suisse.

“US gasoline demand is at lower levels than this time a year ago, while distillate demand remains well below the five-year range and jet plane storage continues to climb. Overall, US oil demand is still down by 3 per cent year-on-year.”

At the same time, he says, US petroleum inventories are among the highest levels of this decade and a further 100m barrels of oil is being held globally offshore in tankers.

Mr Redman says an examination of the longer-term association between the real oil price and global spare oil capacity indicates two important factors.

“First, the oil price only tends to spike up once spare capacity falls below the critical 2-3 per cent level – the International Energy Agency does not project this occurring again until 2014. Second, using the IEA's estimate of 2010 spare capacity of about 8 per cent, the oil price would typically be closer to US$40 a barrel.

“For now, the market appears to be pricing in the return to a tighter supply environment well into the next decade and disregarding the current glut in supply.

“Going forward, the Credit Suisse oil team is targeting $70 a barrel for WTI – and $68 a barrel for Brent Crude.”