And what an extraordinary year 2008 has been! From peak to plenty, the energy world has covered an exceptionally long — rather tumultuous — distance over a period of less than six months. As 2008 began, global energy markets crossed the Rubicon — the $100 mark — for the first time in history. And then it continued and continued registering one peak after the other, touching the $147 a barrel mark on July the 11th to be exact.
And precisely at that moment, there were discussions all along of oil going even beyond the $200 mark. Those were the days it were the proponents of the peak oil theory who were reigning. Mat Simmons and Co. had a mesmerized audience before them.
The entire world was at a loss, not knowing what the truth was. But now all this seems to have changed drastically. In less than six months, this industry, so crucial for sustaining the civilization of ours, stands completely transformed. It is now in the grip of what is being termed as over capacity. Ground realities have changed by 360 degrees. The year 2008 marked the worst ever year in the history, as far as oil markets were concerned. Who could have thought so even mid-last year.
The world oil market is now being shaken by “a recession shock” affecting all — the conventional, alternative, and renewable energy sources, says Daniel Yergin, the chairman of Cambridge Energy Research Associates (CERA). And he has reasons indeed.
Demand destruction is now a real fact of life impacting the global energy industry. The IEA Annual Energy Outlook for 2009 predicts that American oil use, instead of growing rapidly, will remain mostly unchanged through the year 2030.
New fuel efficiency rules for vehicles, requirements for increased use of renewable fuels and increased fuel prices will limit demand in the world’s largest consuming economy, it is now being felt. OPEC is also expecting global oil demand to slide even further over the next year — with the total global requirement averaging 85 million barrels per day by the end of 2009.
At the start of 2008, analysts estimated global demand growth to be as high as 2.1 million b/d. Now as per CERA’s estimate, the demand for 2008 in fact declined by 300,000 bpd and for 2009, they expect an additional 660,000 bpd drop. “The last time demand dropped this much was in the deep recession of 1981,” CERA emphasizes.
The CERA report presented at the London energy meeting hosted by Prime Minister Gordon Brown of the UK highlighted another interesting aspect of the global energy equation. It says that notwithstanding the weakness in oil demand and prices, oil supply capacity — the difference between total liquids production capacity and actual output — will expand as new supplies, already under development, come to market. In the changed environment, CERA emphasizes that the surplus in spare capacity will be a “defining factor” for the oil market.”
“Spare capacity will increase significantly in the next few years due to falling oil demand and as supply materializes from investments already under way,” emphasizes Yergin. And currently there are other negative pulls on the market too. Rising inventories are an additional burden on the collapsing markets. The EIA report released last week illustrates a further fall in the demand on energy. At 318.2 million barrels, US crude oil inventories are in the upper half of the average range for this time of year.
And all this would have repercussions too. The steep fall in oil prices is causing “havoc” with investment plans in oil producing countries and jeopardizes future oil supplies.
The Saudi Oil Minister Ali Al-Naimi strongly believes that the prevalent market prices were already too low to support the necessary investment in energy projects. “Today’s price levels are wreaking havoc on the industry and are threatening current and planned investments,” he said.
In the midst of all this, it seems extremely hazardous to look through the crystal ball and try and project estimation on oil markets behavior in the New Year.
A number of factors would impact the final scenario. Would OPEC be able to stand by its commitments? How the global economy would behave in 2009? How the emerging economies, often termed as the major driver of the Bull Run on the market, would behave in the changing global environment?
Professor Paul Stevens of Royal Institute of International Affairs says, “In 2009, we will see continued prices weakness in first half or quarter of year. A lot depends on demand and that depends on the nature and depth of the economic recession...if demand does not completely collapse, my guess is that as we move through 2009, as OPEC’s determination to defend its price bears up, then prices will creep up to $70-80.”
Fadel Gheit of Oppenheimer believes that oil and gas prices will remain volatile, but they will fluctuate in a much narrower range than in the last 12 months. Excessive speculation, as opposed to market fundamentals, fuelled last year’s price swings, he says. Anne Kohler of Caris & Company forecasts an oil price target of $45 per barrel for the first half of 2009 and just $50 at the end of the year.
According to a recent Reuters’ poll, analysts have cut their 2009 price forecasts by more than $14 a barrel to an average of $58.48 for US crude, as recession dampens demand for fuel worldwide. Oil price forecasts have been brought down by nearly $60 in the past 5 months, and most analysts now see prices rising early 2009 from the lows experienced in 2008.
The consensus forecast was for US crude to average $49 in the first quarter of 2009, down from $64.57 in last month’s poll, as analysts moderated their expectations further of a price recovery.
Only one thing at this stage seems certain. The peak attained in 2008 is now a mater of a bygone era — one has to concede. And in the meantime, the pundits of peak oil theory — the Mat Simmons & Co. seem nowhere on the horizon — at least for now. And what a relief indeed!