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BMI Global Oil Market Report Q210: Not So Bleak Midwinter
Business Monitor International, April 2010, Pages: 22
BMI’s quarterly global oil report, containing supply, demand and price forecasts to 2014 for the oil and refined products markets.
While it would be rash to overstate the likely impact of the arctic winter on overall OECD oil demand, it has clearly had a hugely beneficial impact on market sentiment at a time when macroeconomic bullishness was under pressure and high oil inventories were dampening enthusiasm. OPEC crude, which climbed above US$77 per barrel (bbl) at the beginning of December, dropped like a stone to barely US$71/bbl in the week before Christmas. Without the unexpected winter wonderland, crude could well have moved significantly below the US$70/bbl level as the year came to a close.
The US was the first to suffer heavy snowfall and tumbling temperatures, with the Atlantic swiftly shipping the blizzards to Europe for a few weeks of misery for businesses and individuals. The usual logistical challenges followed, with Eurostar trains breaking down in the Channel Tunnel and aircraft grounded at many British and continental airports. Points froze on the railways and driving conditions were hazardous. Britain and parts of Europe had their toughest winter for 30 years–although we do not yet know if the OECD winter will be colder than the unusually chilly 2008/09 season.
Oil prices rebounded by a cool US$8/bbl as the big freeze set in. Much of the recovery was retained into the New Year. Inventories may have benefited from a larger-than-expected draw, although preliminary December data are not particularly encouraging. The use of oil in transport must have suffered and, with many businesses and schools disrupted, it is not certain that higher household oil demand will have resulted in OECD consumption higher than that seen a year earlier.
According to the Energy Information Administration (EIA) in its January 2010 Short-Term Energy Outlook, global oil demand declined in 2009 for the second consecutive year. This is the first time since 1983 that this has occurred. The decline bottomed out in the middle of 2009, as the world economy began to recover. EIA data suggest that non-OPEC oil supply increased by more than 0.6mn barrels per day (b/d) in 2009, the biggest annual increase since 2004. Higher production in the US, Brazil and the Former Soviet Union (FSU) was the major contributor to this growth.
This pairing of falling demand and rising supply should have dealt a hammer blow to the oil markets and delivered rock-bottom oil prices. OPEC, however, reined in supply, by -5.2% according to
BMI estimates. Inventories still rose to almost unprecedented levels but, on this occasion, the normally reliable correlation between stocks and prices broke down. The resulting 35% (year-on-year) crude price fall was a pretty benign outcome in the circumstances, with oil rising 78% between January’s monthly average and that of December 2009.
Prior to the arrival of cold weather, the inventory position was a real worry. OECD industry stocks had risen against the seasonal trend in November 2009, gaining 12.6mn bbl to a whopping 2,747mn bbl. The five-year average change in November is a draw of 4.1mn bbl, according to the International Energy Agency (IEA). It was clear that demand remained weak and too much supply was being provided to the market. A large build in European crude stocks and an increase in North American gasoline inventories accounted for much of the unwelcome rise.
Preliminary data for December, however, indicate that total OECD industry oil inventories fell by 35.8mn bbl, driven by a 28.2mn bbl decline in US products. The draw in middle distillates, driven in part by colder winter temperatures in major northern hemisphere markets, accounted for about a quarter of the total OECD change. The five-year average stock change for the OECD in December is a draw of 41.9mn bbl. This should not prompt too much excitement. Stocks are still uncomfortably high, even if the market appears to be happy with a higher base.
In spite of apparent over-supply, crude production by OPEC members continued to edge higher in December, with output up by 75,000b/d to an estimated 29.1mn b/d. Compared with December 2008, this represented a helpful reduction of 1mn b/d. For the 11 members governed by the production ceiling, output of 26.6mn b/d was 1.8mn b/d above the agreed target (a 58% compliance rate). Better quota adherence would have meant lower stocks and potentially still higher prices. IEA calculations suggest end-2009 spare OPEC productive capacity of 5.4mn b/d. OPEC ministers again left production targets unchanged at their December meeting, having stuck with them throughout 2009. The group’s leadership acknowledged the delicate balance of the oil market and called on members to improve quota discipline. Secretary General Abdalla el Badri said compliance of between 75% and 80% was needed. It is notable that Saudi oil minister Ali al Naimi described a range of US$70-US$80/bbl as ‘a perfect price for the world’. Consumers might argue, but this level should ensure adequate investment, while not derailing economic recovery. Unfortunately, it will be hard to deliver consistently in such a narrow range. While OPEC’s crude production rose steadily throughout 2009, it looks to have averaged 28.7mn b/d and fallen some 2.5mn b/d from the 2008 level. This is arguably the single biggest contributor to the 78% price rise seen between January and December. OPEC production was actually back at 2003 levels. While this reflects a determination to support prices, it was achieved only with the help of Nigeria’s unplanned shortfall and the inability of certain other members to reach even their allocated production ceilings.
As a noble sacrifice to the greater good of the oil market, Saudi Arabia bore the brunt of the cutbacks, accounting for 39% of the 2009 decline to an average 8.2mn b/d of crude. Kuwait and the UAE were the other major contributors to the voluntary reduction programme, together accounting for 25% of the cutbacks. Non-OPEC supply in December increased by 0.2mn b/d to around 52.0mn b/d, according to the IEA, with the US and some Asian producers surprising on the upside. During Q409, Norway pumped more oil than had originally been forecast. Average 2009 non-OPEC supply is now forecast by the IEA to have averaged 51.3mn b/d. For once, non-OPEC exceeded the IEA’s expectations, beating its original estimate of 50.6mn b/d. The higher outcome stems largely from Russia’s unexpected surge in production, as well as the absence of hurricane disruptions in the US Gulf of Mexico (GoM). The overall non-OPEC y-o-y output gain was therefore 1.2mn b/d.
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