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Weak oil market reflects the fragile economic recovery

Global Arab Network - - Mohamed Tamer

Monday, 21 December 2009 14:55

Oil market fundamentals have weakened over the past month, as economic recovery in the industrialised countries has faltered. The stock draws expected for the final quarter of 2009 have not materialised and inventories have continued to rise. Although Centre for Global Energt Studies (CGES) still expects global oil demand in the current quarter to record its first year-on-year increase since 2Q08, the rate of growth now appears likely to be lower than CGES thought a month ago. OECD oil demand is still falling and weakening fundamentals may now be exerting downward pressure on oil prices, which have fallen by around $6/bbl (7.5%) since the beginning of the month.

The frailty of the economic recovery in the developed countries of the OECD has been highlighted in recent weeks. Industrial production in the Eurozone fell in October for the first time for six months, while unemployment outside the public sector continued to rise. Across the Atlantic, though, US industrial output posted a 0.8% increase in November, but this has done little to boost oil demand. The latest weekly data from the Department of Energy show US middle distillate demand in the first 50 weeks of 2009 down15% from the 2007 level, while comparing only the most recent six weeks shows demand down almost 20%. Gasoline has fared somewhat better, but US demand for this product is still almost 5% down on the 2007 levels.

On the other side of the oil balance, supplies have been growing more strongly than anticipated earlier in the year. The recovery in oil prices has helped Russian companies to limit the output declines in West Siberia, allowing new fields to more than offset the losses, while production from the Caspian Sea has also been growing steadily. Rising US, Brazilian and Colombian production has helped to lift non-OPEC oil supplies this year by around 570,000 bpd compared with 2008. Additional OPEC NGLs and Iraqi crude oil, which are not restricted by the Organisation’s quota system, have helped to lift annual average non-quota-controlled output by nearly 1.1 mbpd in 2009.

Meanwhile, OPEC’s quota discipline has been slipping and output from the OPEC-11 is now nearly 800,000 bpd higher than in March, when compliance was at its best.

Nigerian oil producers are making the most of an indefinite ceasefire in the Niger Delta to repair damaged infrastructure and restore production, helping to lift the country’s output back towards 2 mbpd. Oil ministers, taking part in their end-of-year meeting in Luanda, are likely to leave quotas unchanged, although they will be concerned about the growing leakage, even though oil prices remain close to their $75/bbl target level — for now.

Unless something happens to start reducing the stocks of crude oil and refined products (mostly middle distillates) in onshore and floating storage over the coming weeks, market fundamentals are likely to begin to exert increasing downward pressure on oil prices in the new year. Chinese and Indian refiners are continuing to buy and process more crude oil than they need, with the excess products, especially the middle distillates, ending up being stored in tankers off the coasts of the major oilconsuming countries. Unless these floating stocks — now reaching 100 mn bbls of products alone — are reduced, either by cold weather or through rising economic activity, oil prices are likely to slip back in 2010.

Global Arab Network

Extracted from "Oil Market Forecast and Analysis" by CGES

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