LONDON: World oil demand will be slow in the early part of 2010, stocks are high and there is plenty of unused capacity, Royal Dutch Shell’s chief executive said on Thursday, suggesting downside risks for oil prices.
The cautious outlook suggests Shell, which vies with BP PLC as Europe’s largest oil company by market value, expects little immediate help from the outside environment in boosting profit and follows similar comments from other industry leaders on the weak prospects for oil demand.
“My outlook for 2010, I would not call a rosy one,” Shell CEO Peter Voser said at a news conference. “I think you will see the demand being sluggish going into 2010.
OPEC’s secretary general made similar remarks this week, seeing little real demand recovery until the third quarter. The chief executive of BP, in a bold prediction, said he expected world demand to peak sometime after 2020.
Crude oil was trading above $76 a barrel on Thursday, up from near $33 at the end of 2008 when the Organization of the Petroleum Exporting Countries announced record production curbs to prop up prices as the recession hurt demand.
Those curbs, which OPEC has left in place for more than a year, have been effective in supporting prices, but they leave the producer group with a large amount of unused capacity which is overhanging the market, Voser said.
“Oil inventories remain at high levels, and so the outlook for the 2010 oil price is uncertain, but it is likely that OPEC will be managing against a downside for some time.”
Many forecasters such as the International Energy Agency and OPEC expect world oil demand to return to global growth in 2010 as the economy recovers. However, both agencies trimmed their demand forecasts slightly in January.
“I’m very cautious about 2010. The stimulus packages will have some GDP growth impact still in 2010, but we see the environment rather weak in 2010, it will take longer I think than expected,” the Shell chief said.
He was speaking after Shell earlier on Thursday reported disappointing fourth quarter earnings due to a weak refining business, and said it will freeze its dividend in 2010 and cut 1,000 more jobs.
Net profit was $1.96 billion, compared with a loss of $2.81 billion in the same period a year ago, when the company took a multibillion dollar writedown on the value of its inventory after a sharp fall in the price of oil.
Stripping out the inventory effect, however, profit fell 75 percent to $1.18 billion from $4.79 billion.
“We are facing challenging market conditions,” Voser said.
“Especially downstream (in refining) and natural gas, despite the headline increase in oil prices, and the outlook for 2010 remains difficult.” Shell produces about equal amounts of oil and gas, and while oil prices rose from the fourth quarter of 2008, a sharp decline in natural gas prices meant that Shell’s combined selling prices actually fell. In addition, its combined production dropped by 2 percent to 3.33 million barrels per day.
As a result, the company’s production arm saw profits fall 46 percent in the fourth quarter to $2.54 billion, due partly to a one-time gain of $1.4 billion in the same period a year earlier. Shell’s refining division posted a loss of $1.76 billion, from a profit of $561 million, as intake fell and margins worsened.
Shares in the company fell 1.7 percent to 20.04 euros in early trading in Amsterdam.
“Refining clearly is the negative story of this reporting season for majors and has taken its toll across the board,” said analyst Alexandre Weinberg of Petercam Bank.
He said Shell is in a good long-term position as the company has invested heavily in developing new oil fields in recent years to turn around a decade of production declines.
But Voser said Thursday he expects production to remain about flat in 2010 and new fields will only really begin adding to production in 2011.
Voser said the company was looking at selling some 15 percent of its refining operations, but defended the business as part of the company’s long-term integrated structure.
He noted that a quarter of the company’s projected $28 billion in 2010 capital expenditure would be on refining projects, notably in Singapore, with the rest to production projects.
