Andrew Main, Business editor | January 05, 2009 Article from: The Australian
WHO'D like to predict where the price of oil will finish 2009?
No, I didn't think so. Goldman Sachs followed up its mid-2008 $US200 a barrel prediction for 2009 by stating (quietly) that it would no longer forecast the price of oil. And if GS can't, there's probably not a lot of hope for the rest of us.
West Texas Intermediate started 2008 around $US100 a barrel and ran up to $US147 in July, then bumped down the stairs to $US31.41 on December 22 -- its lowest level in more than five years.
That's a drop of more than $US100 top to bottom, highlighting the first annual decline since 2001 and the biggest drop since futures trading started in 1983.
In short, it was way overbought in getting almost to $US150, thanks to a combination of speculative frenzy and serious global nerves about demand exceeding supply. So is it now oversold?
That's a harder one, with evidence turning up from everywhere that global demand has fallen well below forecasts.
Statistics issued by the International Energy Agency last month said global daily oil demand in 2008 dropped for the first time since 1983, easing by 200,000 barrels a day to an average 85.8 million barrels per day. The previous 2008 forecast had been for a rise of 150,000 barrels a day to 86.15 million.
The Paris-based IEA now sees daily demand in 2009 moving back up to 86.3 million barrels, on the assumption that the global economy will start a gradual recovery from July this year.
Supply, meanwhile, eased in November to around 86.5 million barrels a day, which still leaves a clear oversupply. That creates problems of its own since oil has a fairly inelastic supply chain. It's not something like bread that you can put in the freezer for later. It's in the ground, a pipeline, a ship or a storage tank, and that's it.
There is a US Strategic Reserve of 727 million barrels but, not surprisingly, it too is almost full.
The dropping oil price has meant that refiners have cut back on ordering crude, since their margins get squeezed during a downturn. That's had a double-whammy effect: if you're running a refinery while prices are dropping, you can afford to let your stockpile drop as long as you can be sure of replacing it at an equal or lower price to your last order. Down goes the price.
Out there in sentiment land, meanwhile, there are two positives: one political and the other seasonal.
The Gaza Strip violence is seen as the force behind the recent jump of more than $US10 in the crude price. There's no oil in Gaza or Israel that we know about, but Arab producers have a history of crimping supply in protest at what they see as Israeli aggression.
Back in 1972-73, the price of oil was around $US3 a barrel and by the end of the Yom Kippur war of 1974 -- which, incidentally, was started by attacks on Israel by Syria and Egypt -- it had quadrupled to $US12.
The episode brought the Organisation of Petroleum Exporting Countries to prominence and resulted in an OPEC production cutback of 5 million barrels per day. Non-OPEC countries could only make up 1 million barrels per day of the shortage.
The other variable is the US winter. It has provided some short cold snaps already, but the major freeze won't come in until around February. Any US heating oil user who hasn't already laid in a winter stock by January 1 is a candidate for psychiatric assistance, but human folly never fails to surprise on the downside. Demand may yet jump.
The big supply issue looming is whether a 2.2 million barrel a day OPEC production cut, announced on December 17 and scheduled to start last week on January 1, actually sticks. Clearly, if it does, the daily production overhang will disappear.
The Wall Street Journal's Keith Johnson last week quoted Conrad Gerber, head of Geneva-based research group Petro-Logistics, as saying he did not believe the cut was going to happen.
Gerber noted that OPEC's major oil producers had already committed to much of their January output. The cuts will start in February at the earliest, he said, and would take a few months to get up to speed.
As Johnson noted, producers outside the Persian Gulf regularly backslide on production promises, and collapsing oil prices have only increased short-term budget pressures on major producing countries like Iran.
The January 1 cuts, announced in Algeria, are the third round of production cuts announced by OPEC.
OPEC's view of a fair price for oil is $US75 a barrel. Associated Press reported last week that OPEC appeared to be displaying a newfound discipline, with daily OPEC oil production in December coming in at an average of 27.1 million barrels, below the oil cartel's production ceiling of 27.3 million barrels. As we saw so clearly in 2008, sentiment in the oil market can change direction sharply, with no equivalent change in supply-demand fundamentals.
The biggest long-term bull factor for the oil price in the next 12 months will be what was driving the price up to $US147 in the first place -- the predicted increase in oil consumption by the world's two most populous nations, China and India.
The IEA report in December predicted China would use 8.2 million barrels of crude a day in 2009, up from 7.9 million in 2008, but it's clear any statistical predictions involving those two developing countries contain a major element of guesswork.
What's clouding that story is that US numbers are a great deal more detailed and immediate and they're indicating that consumption has dropped. The US Department of Energy has reported that overall oil use in the US fell by 3.7 per cent during the four weeks ended December 26 from a year earlier.
Those numbers have more impact in the short term because the world's largest economy uses about 20 million barrels of oil a day, or almost three times what China uses. It's one thing to see a long-term trend, but the spot price of oil has clearly decided for the moment to be focused on the here-and-now statistics of daily global oil supply and demand numbers.
As with every other sort of market, sentiment could change in a very short time and when it does, we'll be heading back up towards $US70 a barrel and beyond.
