Asian and Middle Eastern buyers have resorted to using Dubai's rival benchmarks to purchase oil as Dubai traded at a premium to both Brent and WTI for most of 2009, Organisation of the Petroleum Exporting Countries (Opec) noted in its monthly report.
The factor may also be balancing oil prices in Asia, Opec said. "Brent's discount to Dubai kept balance in the Asian market by attracting rival grades. Market sentiment improved on the back of lucrative price differentials, leaving room for higher spot premiums. Quietness resumed later in the week as refiners waited for February allocations. The Dubai premium to Brent widened to $2.08 per barrel in the first week," noted the monthly publication for February.
Dubai is a benchmark set up by energy publication Platts and it factors prices at Dubai Mercantile Exchange (DME) into its pricing mechanism. It mostly trades at a discount to other major benchmarks. Opec data sho-wed that Dubai crude began trading at a premium to Brent (the crude benchmark for International Commodities Exchange – ICE) early in December 2008. It traded at a discount to Brent late in January before again assuming a reverse trend.
The report noted that "quietness" has prevailed in Middle Eastern and Asian markets in 2009 even as other markets have either been oversupplied or have faced other problems.
Elaborating on global oil markets, the report said demand will slacken in the second and third quarters before rising in the fourth quarter. While Opec predicts the global oil demand in the first quarter to stand at 85.68 million barrels per day in the first quarter, it predicts that it will fall to 84.40 mb/d and 84.55 mb/d in the second and third quarters, respectively. Opec said demand will show resilience in the last quarter and rise up to 85.88 mb/d. The group predicted that average demand for 2009 will stand at 85.13 mb/d.
"World oil demand continues to decline from last year and is expected to follow this strong negative pattern for the first three quarters of the year. Oil demand in OECD is experiencing a steep decline resulting in the region's economic depression," it said.
The demand for Opec crude in 2008 is estimated to have averaged 30.9 mb/d, a decline of 0.4 mb/d from the previous year. In 2009, the demand for Opec crude is expected to average 29.2 mb/d, a drop of 1.7 mb/d from the year earlier, Opec said.
Decline in demand
Even though it's the OECD countries that are colder and therefore should have supported demand, it is the warmer developing world that is supporting demand, Opec said. "Demand in OECD, North America, Europe and the Pacific declined by 1.2 mb/d in January. However, the positive growth in non-OECD demand reduced the world decline to only 0.7 mb/d. Although the OECD regions in general are colder than average by 10 per cent, which led to more demand in heating oil and kerosene, slowing industrial production has suppressed consumption of industrial fuel," the report added, reflecting a view similar to several other agencies that have made oil demand forecasts.
As a result of the continuing deterioration in the global economic outlook, world oil demand has been revised down a further 0.4 mn b/d to show a total decline of 0.6 mb/d in 2009 to average 85.1 mb/d, the report added.
Opec linked oil demand directly to the performances of economies in the West.
"It is still unclear what impact the United States stimulus package will have. Key Asian countries are suffering from a large decline in exports, with Japan experiencing a 35 per cent decline in December and China experiencing 17.5 per cent year-on-year decline in January."
Opec termed the decline in production as the first since 1999. "In 2009, non-Opec oil supply is projected to increase by 0.5 mb/d following a minor downward revision. In January, total Opec crude oil production averaged 28.71 mb/d, according to secondary sources, representing a decline of 959 tb/d from the previous month," the group's report said.
With winter in the northern hemisphere coming to an end, the oil markets may become even more bearish, Opec said. "Product market fundamentals are expected to remain weak over the medium term, but cold winter weather temporarily provided support for product prices and refining margins. The situation is likely to turn increasingly bearish with the approaching end of the winter season," the report said.
Opec supported a recent report by Merrill Lynch that new refinery capacity in Asia may turn the oil markets even more bearish.
"The startup of new refining capacity in Asia and the continued slowdown in demand due to the economic crisis should only accelerate this trend. Seasonal refinery turnarounds are expected to exert further pressure on product prices over the coming months," it said.
The deterioration in the world economy has led to a significant reduction in global oil consumption, Opec said. The sudden and massive erosion in demand has helped push crude oil inventories up sharply, in some key areas close to maximum capacity, it added pointing a finger toward record inventory levels in the US and China. The increase in inventories can be seen across all components of oil stocks.
Low oil prices are having a direct impact on related businesses such as shipping. "Except for the Very Large Crude Carriers (VLCC) sector, which had vessels tied up as storage to take advantage of the deep contango structure in the forward market, spot freight rates for crude oil tankers declined in January impacted by the lower activity and reduced Opec output. Product freight rates were also lower with East of Suez routes showing the largest drop," Opec said.
Opec expressed concern over hoarding of oil by dealers to make use of currently prevailing contango (future price above spot prices). "By the end of January, an estimated 70 to 80 mb was being stored offshore in 35 to 40 VLCCs, representing seven to eight per cent of the world VLCC fleet. This created an unexpected spike in freight rates at a time when the market was expecting tanker demand to be lower due to much lower requirements for Opec oil," it said.
The deep contango and the slowdown in demand in the US have encouraged the accumulation of oil inventories at the key WTI delivery point of Cushing, Oklahoma. As a result, storage has risen sharply and now stands at 34.9 mb, approaching maximum operational capacity. This has led to a distortion in the price of benchmark WTI, which has diverted from broader market fundamentals. A widening differential of prices and WTI's trade at a considerable discount, has been forcing oil producers to more stable benchmarks, according to news reports.
Warning against the ill impacts of still growing inventory levels, Opec called for stronger co-ordination among its member nations.
"The high and growing stock levels – particularly for crude oil – are likely to continue to disrupt the overall stability of the market. Their impact will become even more pronounced with the onset of low seasonal demand as well as the upcoming refinery maintenance period," it said. "The current state of the market under prevailing supply and demand uncertainties, combined with the deepening economic crisis, highlights the importance of Opec's actions to stabilise the market. It also demonstrates the need for broad co-operation across the oil industry to meet these challenges."
It said Opec average basket price has been more stable as compared to most other benchmarks. "US dollar fluctuations and the efforts to put together a US stimulus plan revived market volatility. The Opec Reference Basket rose $2.92 or 7.6 per cent to stand at $41.52/b in January. In February, the basket remained in the lower $40/b range. The stimulus plan along with refinery work in the US and the UK maintained some bullishness that offset poor economic data and declining demand. The basket stood at$41.79/b on 12 February," Opec said.
Floating storages are providing a substantial support to oil prices, Opec said. "Adding to the stronger momentum was buying of regional grades for floating storage. The Brent premium to WTI widened to average $6.24/b in second week, after peaking to over $9/b by the end of the week. Moreover, continued healthier refining margins while supply was tight for February delivery sustained the bullish sentiment in the marketplace."
Reduction in supply, a cold spell and stimulus packages around the world have balanced economic woes to revive the crude oil futures market, instead of spot markets, Opec said. "The futures market started the year with an upward push from geopolitical tensions in the Middle East and from the Russia-Ukraine natural gas dispute. Crude oil futures surged to nearly $49/b, a level last seen in early December, although the sentiment reversed quickly on the back of the gloomy economy. Nonetheless, Nymex WTI averaged the first weekly period $9.04 higher at $47.08/b, to close at $48.58/b," Opec said.
The developing world
Opec said countries such as India and China are using the low oil prices to make up for the losses they suffered earlier when the prices had risen to record highs. However, with the economic crisis unleashing one tremor after another, governments in these countries are facing problems with their economies.