JP Morgan raises oil price forecast to $118

The bank raised its Brent forecast for the second quarter to $118 a barrel from $105, which combined with smaller increases for the third and fourth quarters, results in an increase of $6 for the full-year 2011 projection to $110 a barrel.

JP Morgan expects WTI to average $99 in 2011, also $6 higher than the previous forecast.

"There is a real risk that oil producers respond to, rather than pre-empt, price signals, or perhaps wait until OPEC's meeting in mid-June before raising output," JP Morgan analysts headed by Lawrence Eagles said.

"By then, it will be too late to prevent higher prices and could extend what we see as a mid-quarter blip to a much more serious and destabilizing price surge that could distort stock-holding behavior and economic growth, leading to more significant problems in stabilizing the oil market," the bank said in the report dated March 24.

JP Morgan's left its forecast for 2011 global oil demand growth unchanged at 1.7 million barrels per day (bpd) as decreases for some OECD countries, Libya and Egypt are offset by an increase of 300,000 bpd in expected consumption from Japan and higher Chinese use.

"Timely additions of oil to meet summer driving needs would help to calm concerns about actual and feared supply shortages and stabilize oil prices (albeit at a higher level), but a failure to do so could cause a dramatic shift in oil supply expectations and a resurrection of peak oil fears," according to JP Morgan.