Summary
Jad Mouawad in New York reported in the July 10 issue of the New York Times that oil prices fell below $60/bbl on Thursday. Traders and investors now accept that global economic recovery will take longer than earlier hoped. After a volatile session, crude oil closed above $60. In the last six trading days, prices have fallen by $10/bbl. On Thursday the U.S. Energy Department reported higher gasoline inventories indicating weak consumption. Michael Wittner at Societé Generale in London expects prices to fall to $50/bbl. Still oil prices have rebounded sharply from the $33/bbl low of December 2008. The International Monetary Fund thinks the global economy will shrink by 1.4% this year. The U.S. Commodity Futures Trading Commission is contemplating a clamp down on speculation. Still, even with continued weak demand, many analysts do not expect a substantial fall in prices. OPEC has managed to reduce production to match the drop in demand. Oil consumption is expected to fall again in 2009.
Analysis
For the first four months of 2009, world black oil production averaged 70.280 million bbl/day. That compares with 73.227 for the same period of 2008. Natural gas liquids are down by 300,000 bbl/day. Adding in "other" components such as Canadian oil sand, Orinoco Tar Belt and biofuels (ethanol), total avails are off perhaps 3.8 million bbl/day compared with 2008. These reductions are due, as we know, to OPEC shut ins plus fewer capital and exploratory outlays which commenced in Q-4 of 2008. The capital reductions accelerated in Q-1, 2009 and even further in Q-2. In the face of recently observed crude oil price declines, no one expects capital expenditures to increase much for the rest of the year. Additional weakness could derive from new non-OPEC projects coming on stream throughout the remainer of 2009. These are projects that were too far advanced to be postponed or cancelled including several in the deep waters of the Gulf of Mexico, West Africa and the Santos basin of Brazil. These will soon taper off and natural depletion will erode existing supply. Thus entering 2010, the market will see fewer barrels coming on line. Erosion of existing supply will continue. OPEC will, no doubt, hold the line and the result will be a firmer market tone which will reduce but not eliminate volatility. Producers have now accepted that demand rates will not return to the 2005-08 levels. OECD inventories will hold steady or marginally decline. The only set of circumstances that could alter this forecast would be a second jolt or series of jolts to the financial system that would further reduce worldwide economic activity. Progress is quite uncertain in the U.S. because of extreme debt levels but elsewhere economies are recovering their poise and will likely generate productivity at more or less the same rate as in 2009. Complete equilibrium in crude oil markets never happens. The balance is always tilted either toward demand or supply. Worries about "peak oil" are offset by the growing awareness that natural gas is inexpensive and virtually unlimited in supply. Markets adjust to new realities. Speculation is always based on what traders and investors think about fundamental forces. Since these can never be predicted with any precision, any attempts to dampen speculation will fail.
