- City Fajr Shuruq Duhr Asr Magrib Isha
- Dubai 05:26 06:39 12:34 15:52 18:24 19:37
Overall, the world should still see higher demand in 2010 as economies recover from the worst recession since 1930s, pushing prices to higher level.
This is according to a Morgan Stanley report which, under its base forecast, said oil price would end at $95 in 2010, $100 in 2011 and $105 in 2012. In a bull market, the bank expects price to touch $110 this year, $120 next year and $150 the year after.
The report, sent to Emirates Business, shows optimism even in a bear market as it forecasts $60 by the end of 2010, $65 in 2011 and $70 in 2012. Industry estimates say $60-$70 a barrel is good enough for the oil producing states to pursue their diversification and expansion plans.
Figures from the report show global demand will reach 86.6m barrels per day (bpd) in 2010, two per cent higher than the 84.9m bpd recorded last year, which saw the steepest decline in a decade.
Out of the near-87m bpd demand projection, only nine per cent will come from the Middle East and 10 per cent from China. The lion’s share still comes from North America (27 per cent), OECD Europe (17 per cent) and OECD Asia (nine per cent).
However, the Middle East and China have increased their share in the global demand pie by 21 per cent while the market share of the three OECD regions barely remains the same.
China leads the race with a projected demand growth of 4.8 per cent in 2010 (8.7m bpd), 6.9 per cent in 2011 (9.3m bpd) and 5.4 per cent in 2012 (9.8m bpd).
Running second in the list is the Middle East whose demand is expected to jump by four per cent from 7.3m bpd last year to 7.6m bpd this year. It is forecast to grow by another four per cent year on year in the next two years to reach 7.9m bpd and 8.2m bpd in 2011 and 2012, respectively.
The demand in the region is therefore higher than the non-OECD average increase of three per cent this year. OECD countries, meanwhile, will only see one per cent growth and is thereafter projected to see dwindling demand.
Morgan Stanley projects there will be 1.7m bpd of additional oil demand this year over last year’s 84.9m bpd thanks to a collective GDP growth forecast. Out of this incremental demand, only 200,000 bpd will come from OECD with the non-OECD firmly driving global demand.
The forecasts are grounded on the IMF, whose forecasts were used by the International Energy Agency (IEA), which pegged global GDP growth in 2010 at 3.1 per cent.
“Our economists are constructive on global growth, expecting GDP to expand at a healthy four per cent in 2010, mainly driven by the energy-intensive emerging markets,” said the report. “Economic growth is the primary driver of oil demand, and our economists are calling for 2010 GDP growth of 10 per cent in China and eight per cent in India,” it added. “This compares to the IMF estimates of average GDP growth for 2005–07 of 11.7 per cent and 9.5 per cent for India and China, respectively.”
Inventory clean up
The main driver that will send oil prices to higher levels is the steep inventory draws expected in second half of this year, provided that Opec crude production remains constant at December levels at 29.1m bpd.
“Without Opec increasing production, our balances show severe inventory declines in 2010,” it said. “Our balances show a rapid fall in Opec spare capacity in 2011, as demand growth continues apace and non-Opec supply growth looks set for a bad year.”
It is expected that the heavy overhang of distillate inventories in the US will continue to be cleaned up as demand improves on a combination of colder-than-normal temperatures and improved domestic demand.
The end-of-year inventory management on the part of US refiners helped pull down inventories, and freezing weather across the Northern Hemisphere is giving distillate demand a boost. Its estimates show in the OECD alone colder-than-normal temperatures that have engulfed the Northern Hemisphere added 680,000 bpd to oil demand in the first half of January.
“Data for non-OECD economies are much less transparent, but we would not be surprised if weather in aggregate has lifted global oil demand by more than 1m bpd,” it added. And even if Opec increases production in response to inventory draws, prices are still likely to rise due to constrained upstream projects.
As per its report “Crude Oil: Balances to tighten again by 2012” published by this newspaper in September, Morgan Stanley said there will still be a tight market due to a string of delays in oil producing states.
The bulk of the expansion projects are either expensive such the Canadian oil sands or technically extraordinarily challenging such as the Tupi in Brazil or face geopolitical challenges, such as in the case of Iraq, Venezuela, Nigeria and Kuwait.
If a significant portion of these supplies fails to materialise, global spare production capacity would be drastically reduced, it said.
With supply constrained, it said oil prices will need to rise to a level that tempers economic growth and oil demand. And historically, an oil burden greater than four per cent has been needed to slow economic growth.
“Our analysis of the supply side suggests that demand will struggle to increase in aggregate… As inventories cannot be drawn on indefinitely, this scenario would entail prices moving markedly higher to ration demand,” added the report.
Decreasing spare capacity
Another factor that will drive prices up is the falling spare capacity or the oil cushion that oil producers store in times of emergencies to be able to respond to short-term or unexpected increases in demand.
The price rally in 2005 was blamed in part to the shortage of spare capacity. Most of the spare capacity is provided by Saudi Arabia and are usually sour crudes, which most refineries in the world cannot handle.
The issue of spare capacity has died down over the past two years due to a slump in demand but rising inflation expectations, which factors in oil price rally, are gradually bringing this issue up again.
Morgan Stanley estimates show global GDP growth, pegged at four per cent, will lead to tightening of markets and will require increased Opec production, putting the world back on a course of rapidly falling spare capacity.
It thus expects global spare capacity at 6.5m bpd in the fourth quarter of 2009 to fall to 5.7m bpd by the fourth quarter of 2010. “Our balances show a rapid fall in Opec spare capacity in 2011, as demand growth continues apace and non-Opec supply growth looks set for a bad year,” it said. “We have updated our long-term supply database, which supports our expectation that by mid-2010 the world will be on a course of falling spare capacity, suggesting that higher prices may be a necessity to curtail demand.”
OPEC OUTPUT TO STAY FLAT THIS YEAR
Opec’s oil output will stay more or less flat throughout 2010, with a probability of rising a little initially as compliance with the quotas continues to slip before falling again as the Gulf members cut to lend some support to the market.
The call on Opec’s crude, though, will be lower this year, falling as low as 28.3m bpd in August, the result of a slow recovery in global oil demand and marginally higher non-Opec and Opec NGLs (natural gas liquid) output, said Centre for Global Energy Studies (CGES).
“Given that Opec is unlikely to cut output further at such a politically inopportune time, the gap between Opec’s output and the call on its crude will lead to the stock build and concomitant price fall that we expect to occur in the second half of this year,” it said.
Prices have weakened from $77.28 on January 18 to $72.8 on January 26. This could be attributed to renewed concerns over global oil demand growth in 2010 due to the bearish consumer confidence figures in the United States, warmer weather in the Northern Hemisphere and weak EIA inventory and refining data, said CGES.
“China’s strong Q4 2009 GDP figures did little to kindle enthusiasm and arguably even led to increased wariness due to the prospect of the Chinese economy overheating,” it said.
Subsequently, global stock markets declined sharply in response to the US government’s plans to impose tighter regulations on US banks, further weakening investors’ appetite for commodities such as oil, associated with economic recovery. “All these uncertainties mean that the oil price could be under sustained downward pressure over the next few weeks, even though global oil demand is now recovering,” it added.
Positive oil demand growth may be short-lived
Although global oil demand has increased after declining for five consecutive quarters, the recovery in the use of oil remains fragile and concentrated in developing countries.
The upward pressure on oil prices from rising demand is also being offset by high stock and growing supplies from non-Opec countries and Opec NGLs (natural gas liquid), Centre for Global Energy Studies (CGES) said.
The London-based centre said despite rising demand, market fundamentals are not expected to support upward pressure on oil prices in 2010.
Data from CGES shows 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. December’s surge in oil use, it said, was enough to ensure that global oil demand in Q4 2009 was above that of Q4 2008, the first year-on-year increase in quarterly oil demand since Q2 2008.
It also led to the first quarterly stock draw since the winter of 2007-08. But the impact – it warned - 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,” it said.
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, CGES added.
CGES argues that 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 we believe that whatever growth does materialise will be heavily weighted towards the beginning of the year,” it said.
The centre further contends that 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.
It said Opec’s own crude oil production has been creeping upwards since last March, when compliance with the current quotas was at its strongest.
The more 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 mnbpd 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.
And while some of this may be at risk from project delays, much of it has already been secured, CGES said.
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.
Follow Emirates 24|7 on Google News.