Oil prices have finally broken the $60-74 a barrel range that we have seen since the beginning of June and WTI oil is now trading at approximately $76 a barrel. The Chinese dragon is also blazing a trail under the crude oil market. After sliding to a five-year low of under $33 a barrel in December 2008, oil prices staged a steady climb upward to $82 recently, aided by Chinese stockpiling. On January 5, Zhang Xiaoqiang, deputy of China’s National Development commission, said he’s ‘actively’ involved in the global competition for crude oil, natural gas and minerals to satisfy the country’s thirst for raw materials. Beijing has $2.25 trillion in foreign currency reserves at its disposal, to invest in “infrastructure facilities in key countries which hold resource deposits and have a friendly relationship with China,” Zhang said.
A key component of Beijing’s strategy is to guarantee access to Persian Gulf oil, especially from Iran and Saudi Arabia. China is the top importer of crude oil and natural gas from Iran, and the two allies are bound by energy deals with a total value of $120 billion and growing. China and Japan have been involved in a bidding war over a major pipeline deal to deliver Russian oil from Eastern Siberia.
In Africa, Beijing has invested $8 billion in joint exploration contracts in Sudan, including the building of a 900-mile pipeline to the Red Sea, which supplies 7% of China’s oil imports. Beijing has also concluded oil and gas deals with Argentina, Brazil, Peru and Ecuador. But its main interests are focused in Venezuela, and ambitious oil deals in Canada, the fourth largest and top-most oil suppliers to the US.
Boosting autos sales has been a key ingredient of Beijing’s stimulus programme. China has overtaken the US as the world’s top buyer of automobiles, not surprising since its population of 1.3 billion persons is more than four times that of the US. Roughly 12.7 million cars and trucks were sold in China last year, up 44% from the previous year and far surpassing the 10.3 million sold in the US.
To meet its growing industrial and transportation needs, China imported 17.1 million tonnes ofcrude oil in November, up 28% from a year earlier, emerging as the world’s third largest importer after the US and Japan. But China’s demand or oil could double in the next.
10 years, according to the IEA, if its economy continues to expand at a growth rate of 10%.
It is widely believed that at some point, the growth in Asia and world demand for oil would exceed the available supply, leading to triple digits for oil prices.
On December 25, Saudi Arabia’s King Abdullah told a Kuwaiti newspaper, “Oil prices are heading towards stability. We expected at the beginning of the year an oil price between $75 and $80 per barrel and this is a fair price,” he said. The Saudi kingdom has about 2.5 million barrels per day of excess oil capacity, and could dump more oil on the market, to prevent prices from climbing above $80 a barrel.
However, speculators in the oil markets are putting Riyadh to the test, betting that the kingdom would allow a rally to $85, against the backdrop of a steadily improving V-shaped recovery in global stock markets. Abdullah hinted at this when he said, “Oil prices might rise reasonably,” keeping pace with other asset markets.
The recovery in oil prices we witnessed over the last six months can partially be explained by the cyclical recovery in the global economy. But still, it is quite obvious that the rise in energy prices has gone closely hand in hand with rising equities and a weakening of the dollar. The close relationship between oil and other asset classes has once again fuelled the old discussion about whether oil is higher because of fundamentals or because of speculation.
One way to illustrate the change in demand and demand expectations is to look at the IEA forecast for 2010. Since the first oil demand forecast for 2010 was presented in July, the forecast has been revised higher by the IEA in all the following monthly reports. Oil demand is now expected by the IEA to rise by 1.4 to 86.1 million barrels a day in 2010 after falling by 1.7 million barrels a day in 2009.
I do not think we have seen the last IEA upward revision of global oil demand for 2010 as I am more positive on the 2010 outlook relative to the IEA, which uses the more downbeat IMF economic forecasts in its baseline scenarios. We have also seen upward revisions in 2010 demand forecasts by other official bodies like Opec and the US Department of Energy
Hard data has also shown an improvement over the last couple of months. Implied demand from the US—derived from the weekly EIA data—has witnessed a clear turnaround. Implied gasoline demand has improved. The four-week moving average is now running at 4.4% YoY and total products supplied are up by 0.5% YoY.
Rebound in manufacturing could support distillates are still very weak, down by 11.5% YoY. But, all in all, we are now moving towards a situation where global oil demand is rising on a yearly rate for the first time in two years. At the same time, one should be careful not to put too much weight on 2009 data compared to 2008. The so-called base effect is very strong at the moment, as demand almost collapsed in the aftermath of the Lehman bankruptcy. If we look at the two-year change in implied demand in the US, it’s clear that demand is still well below the level seen two years ago. Distillate demand still has a long way to go before reaching 2007 levels.
Furthermore, we should not forget that US stocks are still abundant with distillates way above the five-year average, without clear signs of a decline. Gasoline stocks, on the contrary, are close to normal and crude oil has in fact shown a declining trend during the autumn. The latter is very encouraging and one of the first signs that the global glut of oil is currently being worked off.
Although distillate stocks are abundant, higher distillate prices could be expected ahead of the winter season. The heating oil crack is still very low, and is in my view quite sensitive to a recovery in manufacturing demand and perhaps a cold winter. But the market is still fighting a huge stock overhang. And that is the main reason we doubt that we will see triple-digit oil any time soon—it’s simply different from the market that pushed oil close to $150 a barrel last year. We should not forget that the cartel is now stuck with a significant 4-5 million barrels a day of spare capacity, according to the US Department of Energy. Opec puts spare capacity even higher at 6-7 million barrels a day.
It seems that Opec is ready to hike production if oil continues to drift higher. Recently, the Opec secretary-general El-Badri said that the cartel was not comfortable with oil prices returning to $100 a barrel. The secretary general has also said that the cartel would be ready to boost oil production if the global recovery is sustained.
There is little doubt that Opec production cut-backs have been a major factor behind the stabilisation in the oil market since the beginning of the year. For the first couple of months, Opec showed a remarkable compliance rate of 80%. But compliance has dropped lately. According to the IEA, it was running at a modest 62% in September, down from 66% in August. But when we compare Opec compliance over 2000-08 to the current cycle, it remains high in this historical perspective.
Opec production cuts have had the rather surprising effect of pushing residual oil higher. The crack spread for fuel oil has tightened from approximately $30 a barrel to around $10 a barrel. This is rather surprising considering that demand for fuel oil has been under strong pressure due to the 20% drop in global trade. But the combined effect of Opec cutting back mainly on heavy oil and more effective refineries has dominated the market. Tightness is expected to stay in the market for the foreseeable future, as we doubt Opec is about to put out new heavy oil.
If we had to focus on just the current stock situation and current demand, prices ought to be lower. The market, however, is forward-looking and is factoring in a tighter market which is in my view one of the main reasons why oil was able to test $80 a barrel with OECD forward demand above 60 days. This cover is expected to continue lower for the next 3-6 months towards 54-56 days, only slightly above the 52-54 days preferred by OPEC.
Source: Financial Express
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