Global Arab Network | Oil prices: Market fundamentals not supporting upward pressure, despite rising demand

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Oil prices: Market fundamentals not supporting upward pressure, despite rising demand

Global Arab Network - - Gamal Ragay

Tuesday, 26 January 2010 13:25

Global oil demand finally turned the corner at the end of 2009, showing 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, the return of positive global oil demand growth may not be enough to put upward pressure on oil prices in 2010.

December’s surge in oil use was enough to ensure that global oil demand in 4Q09 was above that of 4Q08, the first year-on-year increase in quarterly oil demand since 2Q08. It also led to the first quarterly stock draw since the winter of 2007-08, but the impact may prove to be short-lived. The return of positive oil demand growth after five consecutive quarters of year-on-year declines is a welcome change for oil producers, but growth remains both weak and fragile. Although the World Bank said in its Global Economic Prospects 2010 that the worst of the financial crisis may be over, it warned that global economic recovery remains fragile and will slow later in the year as the impact of fiscal stimuli wanes, a view that the CGES shares.

The recent surge in oil demand has been boosted by temporary seasonal factors, driven by extremely cold weather across much of the Northern Hemisphere, which is unlikely to last beyond the end of the first quarter. A faltering of the economic recovery later in 2010 could rein in oil demand growth once again. The CGES remains less optimistic than the IEA about the strength of oil demand in 2010 and believes that whatever growth does materialise will be heavily weighted towards the beginning of the year.

The return of positive oil demand growth in 2010 may not improve the prospects for OPEC crude oil production increases, since other supplies have also been rising. OPEC’s own crude oil production has been creeping upwards since last March, when compliance with the current quotas was at its strongest. However, the noticeable supply growth is coming from non-OPEC oil producers and from OPEC’s supply of NGLs and condensates, which lie outside the Organisation’s quota restrictions.

By the beginning of 2010, non-OPEC oil production was up by around 0.5 mbpd from the level at the start of 2009. Maintaining this level of production throughout the year would boost annual average non-OPEC oil production by 350,000 bpd in 2010 compared with 2009. OPEC’s rising production of NGLs and condensates is expected to add a further 600,000 bpd of supply on average in 2010. While some of this may be at risk from project delays, much of it has already been secured. Qatar has inaugurated three new LNG mega-trains since last May and a fourth is now in ‘start-up’ mode, with two more to begin production later this year.

The combination of sluggish oil demand growth and rising supply means that there is little prospect of global oil inventories being drawn down this year, unless OPEC cuts its crude oil production. Indeed, the CGES expects the 4Q09 stock draw to be a ‘one-off’, with inventories rising again in 1Q10 and beyond. 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 it does not expect oil prices to fall heavily, the dramatic recovery seen in 2009 may now have run out of steam.

Global Arab Network

Extracted from "CGES Monthly Oil Report"

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