After the wild fluctuations in the energy markets last year, oil-producing nations can be satisfied with the turn of events through 2009.
For the largest Opec (Organization of Petroleum Exporting Countries) suppliers like Saudi Arabia, which experienced a 57% decline in oil revenues in the first eight months of 2009 compared with the previous year, the re-emergence of a price range of $65–75 a barrel during the third quarter has provided reassurance that the global economic downturn has not materially altered the dynamic that delivered them unparalleled revenues since 2004. During 2004–08, Saudi Arabia accrued some SR2.98 trillion ($795 billion) from crude oil exports compared with around SR1.09 trillion during the previous four-year period, according to Saudi Arabian Monetary Authority (SAMA) figures.
Those gains have not been lost to the global recession. When Opec ministers met on September 10, their decision to leave quotas untouched reflected their satisfaction at oil price levels. That prices have edged above $70 a barrel, in spite of a large stock overhang, provided a further tonic for producer morale.
In Saudi oil minister Ali al-Naimi’s view, the oil market has experienced a fundamental change in recent months. The subtext is that the anticipated recovery in global economic growth in 2010 can only drive the price of crude in one direction: upwards.
How much further upwards is the question. Opec’s series of supply reductions over the past year, involving the withdrawal of a stated 4.2 million barrels a day of supply from the market, have helped to restore price support, moving prices up from $32.40 a barrel in December 2008. By mid-September, crude oil was up by nearly two-thirds on its January 2009 price, though still around 50% below the July 2008 peak of $147. Saudi Arabia has shown unparalleled restraint, leaving around one-third of its capacity shut in, even while it implements long-term commitments to production increases that will leave it with 12.5 million barrels a day capacity.
Recovery FIRST
Opec is sanguine about prices at this level, believing that economic recovery must take priority over protecting near-term revenues. Neither does Opec need oil at $100 a barrel to cover its costs safely.
Abdalla Salem El-Badri, Opec’s secretary-general, told the Vienna Opec meeting that the recession was in its final period. “We hope that by the beginning of the next quarter in 2010 we will see the end of the recession, which will be good for everyone,” he said.
Having prices in a $70–80 a barrel price range serves both consumers’ and suppliers’ interests, for the time being at least. Even the International Energy Agency (IEA), the OECD’s oil voice, has become more comfortable with higher prices, pointing out that the investment disincentive associated with lower prices poses greater long-term dangers to its members’ supply outlook than the immediate impact of high oil prices.
The large inventory levels in the market, estimated to be around 500 million barrels higher than average during the third quarter, will have to be drawn down before Opec sanctions can increase in supply.
Yet Riyadh has also given notice of a shift in the way that it views the oil market. Rather than focus on supply/demand fundamentals, Naimi has linked future oil price trends to economic growth prospects.
The focus is more on future demand recovery than on the state of oil stocks. “It’s still an issue of supply and demand, but the market is focusing more on future demand than actual demand. In that sense, it’s financial factors that are proving more decisive than market fundamentals,” says Olivier Jakob, analyst at oil consultancy Petromatix.
This shift taps into the longer-term trend of financial speculation emerging as a decisive factor
moving oil prices. “If you treat crude oil as a financial asset, you have to take into account market expectations – it is priced on expectation of fundamentals rather than the fundamentals themselves, and at the moment it’s the expectation that there will quickly be recovery that is making for a tight market, rather than the actual supply-demand situation,” says Bassam Fattouh, research fellow at the Oxford Institute of Energy Studies.
To get prices back to the mid-2008 levels would require a return of ‘physical’ demand, stoked by a sustained revival in global economic growth. But most analysts believe that the rise in oil prices from $50 to $70 over the summer months can be attributed to improving sentiment in equity markets and speculative inflows to the oil markets, rather than fundamentals.
This could prove a risky assumption, warns Tim Evans, energy analyst at Citi Futures Perspectives in New York. “Traders in general have viewed a V-shaped recovery in the equity market as pointing to a similar V-shaped ‘immaculate recovery’ scenario in the broader economy and in petroleum demand. And that is basically an optimistic assumption,” he says.
The possibility that economic growth could result in investments that reduce petroleum demand, not increase it, has not been factored into market thinking.
This, says Evans, is a mistake, as not all increased spending is going to translate automatically into increased petroleum demand. “To the extent that the US consumer starts spending again, he will be spending it on smaller, more fuel-efficient automobiles, which is bearish for oil, not bullish,” he says.
Within range
Big increases in oil prices are unlikely over the winter period, given the abundance of stocks. Petromatix’s Jakob believes that prices will stay range-bound for the winter before experiencing a gradual increase in 2010 and into 2011 as demand continues to improve. If prices stay below $80 a barrel, this is unlikely to put OECD economic recoveries at serious risk.
Emerging market demand has remained solid and should pick up further momentum through 2010, say analysts. “The base-case scenario is for demand to rise by somewhere between 1 to 1.5% worldwide. That might involve 0% growth for OECD countries and something more robust in emerging markets, and the Bric [Brazil, Russia, India and China] countries,” says Evans.
Cambridge Energy Research Associates
(Cera), in its quarterly World Oil Watch report in
September, expects global oil demand growth to resume by 900,000 barrels a day in 2010 and return to its 2007 high of 86.5 million barrels a day by 2012. Cera argues that emerging markets will drive the recovery of oil demand, increasing from 83.8 million barrels a day in 2009 to 89.1 million in 2014, with 83% (4.4 million barrels a day) coming from non-OECD countries. China alone is expected to account for 1.6 million barrels a day of cumulative growth, whereas just 900,000 barrels a day of growth is expected to come from OECD countries.
Because Opec has cut back on production relative to where the organization was last year, there is ample spare capacity that could be brought back onto the market if demand were to recover more dramatically than anticipated.
This leaves Opec in a strong position to manage the market, though the producer cartel does face some challenges that could weaken its ability to support prices within its desired range. One is that quota discipline could fray, particularly if non-Opec supply increases, in line with high prices, and begins to steal market share from its members restrained by quota commitments.
Higher oil prices over a sustained period could encourage Opec producers to start investing in new growth projects, after the mothballing of a series of new field developments over the past year.
But for the moment, Opec has good reason to be happy with its lot. “Despite the high inventories, this is not altering market expectations about prices,” says Fattouh. “Nobody’s rocking the boat, and even consumers now think that low oil prices aren’t such a good idea.”