Financial analysts differ in expectations for a continuing fall in world demand for energy or a tightening of supplies as demand revives in 2009.
The average price for the Organization of Petroleum Exporting Countries’ basket of 13 reference crudes dropped to a 42-month low of $47.73/bbl Nov. 13, prompting OPEC Pres. Chakib Khelil to invite non-Arab members for sideline discussions at the Nov. 29 meeting of the Organization of Arab Petroleum Exporting Countries in Cairo, ahead of the scheduled OPEC meeting Dec. 17 in Oran, Algeria.
The November session would mark the third meeting of OPEC ministers over market issues in as many months. They agreed Sept. 10 to “strictly comply” with the official 28.8 million b/d production quota adopted in September 2007, which would have eliminated more than 500,000 b/d of overproduction. They voted Oct. 4 to reduce that quota by 1.5 million b/d effective Nov. 1. Less than 2 weeks after that effective date, they were signaling another probable cut.
“It really is primarily about sending signals,” said Paul Horsnell, Barclays Capital Inc., London. “In reality the 2 million b/d cut [as] already agreed left quite a bit in hand to cover further demand weakness. Further, it seems that OPEC supply may well have contracted sharply even before the cut became effective.” The Middle East Economic Survey estimated Saudi Arabian output at 9.1 million b/d in October, 400,000 b/d less than in September and 600.000 b/d lower than in July.
With non-OPEC supply “looking dead in the water” and OPEC supply already coming off market, the cartel’s next cut is likely to be “more than necessary” and will contribute to an over-tightening of the market in the first quarter of 2009, Horsnell said.
Economy ‘worsening’
On the other hand, Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, sees global oil demand falling 500,000 b/d in 2009, pulling down crude prices perhaps to $30-35/bbl “at the lower end.” However, Deutsche Bank expects West Texas Intermediate to average $60/bbl in 2009 and $57.50/bbl in 2010.
In a Nov. 14 report, Deutsche Bank analysts said they expect in 2009 the worst economic performance among industrialized countries “since the Great Depression.” They said, “We forecast global growth rising 1.2%, its weakest performance since the early 1980s, as economic weakness spreads to the emerging markets.”
Both the US Energy Information Administration and the International Energy Agency in Paris have sharply reduced their estimates of oil demand growth in 2009, citing a weaker world economy. Taking into account lower 2008 estimates, IEA cut its 2009 demand forecast by 670,000 b/d to a growth of 350,000 b/d, while EIA reduced its earlier outlook by 1 million b/d to virtually no growth at all next year. “OPEC, which early in 2008 used to have one of the comparatively lowest demand growth forecasts, was [at this point] still using a figure of 760,000 b/d growth for 2009. We are nearly certain this will be reduced with their November report,” Sieminski said.
He expects the call on OPEC crude to decline by 2 million b/d in 2009, roughly the same amount as the reductions the cartel indicated in its September and October meetings. Supply growth outside of OPEC lagged behind industry expectations in 2008 as a result of project delays and because of hurricane damage in the US in the second half of the year. “We expect non-OPEC supply growth will disappoint again in 2009 after falling in 2008. However, we envisage some production growth supplemented by 600,000 b/d of OPEC natural gas liquids,” said Sieminski.
Meanwhile, the forward cover for member nations of the Organization for Economic Cooperation and Development could reach 57 days by third quarter 2009, up by 1 day from Deutsche Bank’s October forecast. “We expect this will put even more pressure on OPEC to trim production,” Sieminski said.
Still, he said, OPEC will have to struggle to cut its production as fast as world demand is expected to drop during the next 12 months. According to a Deutsche Bank study of past production reduction cycles by OPEC, such cuts often take 3-6 months to affect crude markets.
“Since we expect the current quota reduction cycle to persist until the fourth quarter of 2009, it implies any sustained rally in crude oil will have to wait until sometime in 2010,” Sieminski said. “On all counts we view the chances of a rebound in energy and industrial metal prices as a remote possibility in 2009, but the likelihood of price recovery taking hold in 2010 are slightly more compelling.”
(Online Nov. 17, 2008; author’s e-mail: [email protected])
