Oil markets continue emitting mixed signals and pundits stay divided. Yet there is one certainty in the entire equation: Investments or the lack of it to be specific — for a number of reasons — is a cause of real concern.
OPEC (Organization of the Petroleum Exporting Countries) last week held its world oil demand growth forecast steady for 2010, noting indications of improvements in the global economy and voicing concerns that the price of oil remains on shaky ground. OPEC said the world economy was projected to grow by 3.1 percent, up from its 2.9 percent forecast the previous month. “In the coming months, oil market direction will mainly depend on a continuation of the current relatively positive outlook for the global economy, especially in key countries such as the US and China,” OPEC said in its January Oil Market Report. “Should developments turn out to be less positive than expected, market attention will revert back to weak oil fundamentals.”
OPEC hinged its oil demand recovery expectation on the US. But it also noted that the pace of recovery in the US was far from set. “Economic growth in 2010 will still depend on government support following the massive stimulus that has already been provided by the US administration over the course of 2009,” OPEC said. “This raises the question of the sustainability of growth if the government lifeline is removed.”
Given tenaciously high global crude inventories, which remain well above five-year averages, oil’s recent rally was built on speculation, not just supply and demand, OPEC insisted. Overall, OPEC projects the world oil demand to increase by 800,000 barrels per day to 85.15 million barrels per day in 2010. That is steady with its December projections. However, OPEC’s forecast is lower than the outlook issued by the International Energy Agency on Jan. 15, which predicted the global demand to grow by 1.44 million barrels per day (1.7 percent) to 86.3 million a day in 2010. In the meantime, global investment banking and securities firm Goldman Sachs Group Inc. says that the global crude markets could tighten in the coming months — emphasizing on the issues on the supply side of the equation. The investment bank insists crude supply is failing to keep pace with the ongoing demand recovery, a stark reminder indeed.
Global oil consumption will return to levels seen before the financial crisis by the third quarter of this year, the bank said. And at the same time, projects to bring new oil to consumers are still lagging as a result of the credit crunch, Goldman analyst Jeffrey Currie said in a presentation in London earlier in the week.
“By 2011, the market is back to capacity constraints,” Currie said. “The financial crisis created a collapse in company returns which has significantly interrupted the investment phase.” Last month, Goldman predicted that crude would average $90 a barrel in 2010 and $110 per barrel in 2011. That makes Goldman’s outlook for this year joint-highest among 38 analyst estimates compiled by Bloomberg.
For the time being, the markets seem to be held by the lack of fundamentals with consumption pattern being weak. Consequently, the oil prices fell below $76 a barrel on Friday after government figures showed that the United States, the world’s largest consumer — often dubbed the global gas guzzler — continued to use less energy than last year. Refineries, which have struggled to pass higher crude costs along to consumers, are now operating at the lowest levels since September 2008. “This is the lowest level that refiners have operated at in at least 20 years, with the exception of hurricane-induced shutdowns,” said JBC Energy in Vienna.
Natural gas supplies also dropped more than expected to 2.6 trillion cubic feet and are now slightly lower than the five-year average.
Also contributing to the soft markets was a tumble in Asian and European stock markets after President Barack Obama proposed tougher bank regulations, which may see less hot money flowing into commodities markets. In the past years, Goldman Sachs and other major banks have helped funnel billions of dollars of speculative money into oil and natural gas contracts during the past several years. And it now seems that after years of the producers’ insistence, speculation has finally assumed to be a concern in the industrial world too. Steps are thus being taken and regulations tightened in recent months to stem speculation from making the markets berserk.
Also contributing to the soft markets was a tumble in Asian and European stock markets after Obama proposed tougher bank regulations, which may see less hot money flowing into commodities markets. In the past years, Goldman Sachs and other major banks have helped funnel billions of dollars of speculative money into oil and natural gas contracts during the past several years. And it now seems that after years of the producers’ insistence, speculation has finally assumed to be a concern in the industrial world too. Steps are thus being taken and regulations tightened in recent months to stem speculation from making the markets berserk.
Also adding to the market gloom is the lackluster quota compliance within OPEC. Continuing a downward trend, the output by OPEC bounded by quotas increased 68,000 barrels per day in December compared to the previous month. December production, excluding Iraq, was estimated at 26.69 million barrels per day, or roughly 1.6 million barrels per day above the OPEC target output. OPEC compliance with output targets thus slipped to a dismal 56 percent, from an already low 58 percent in November. The prestigious Center for Global Energy Studies in its January Monthly Oil Report conceded that oil demand finally turned the corner at the end of 2009, registering the first year-on-year increase after five quarters of decline, and imparting a positive momentum to the oil market, in spite of high stocks. However, it may not be enough to put upward pressure on oil prices in 2010. In the absence of more robust oil demand growth, or a cut in supply, these rising inventories are likely to put oil prices under downward pressure in the second half of the year. Although we do not expect oil prices to fall heavily, the dramatic recovery seen in 2009 may have now run out of steam, the CGES authoritatively underlined in the monthly report.
Ultimately all hinges on the shape and the health of the global economy. And to be fair that remains far from clear and certainly not out of woods yet!