Where next for the crude market roller coaster?
If the events of 2008 can teach the soothsayers of the oil industry
anything, it must surely be that theirs is a near-impossible task, as oil
prices rose further than anyone would have thought possible, then promptly
fell even further and even faster.
The last twelve months have rewritten many of the assumptions about the
interaction between world oil prices, supply and demand, causing changes
which we are only beginning to appreciate.
Changing outlook for 2009 world oil demand (million b/d)
The collapse in prices seen in the latter months of 2008 and
the rapid deterioration in the financial climate are causing oil
companies to rethink investment plans ... |
Add to the mix the difficulty in estimating how deep a global recession
might be and how long it might last for, and the assumptions underpinning
any short-term forecasts suddenly look rather shaky.
To understand where the industry goes from here, we have to take stock of
exactly what has happened over the last 12 months and what its impact will
be.
Over this period, we have seen oil prices on the world's main futures
exchanges reach the giddy heights of more than $147/barrel, despite the
apparent paradox of weak sentiment in the underlying physical crude markets.
OPEC seemed powerless to prevent the run-up in prices, which left many
market-watchers scratching their heads as they looked in vain for
fundamental reasons.
The ensuing freefall in outright prices was accompanied by even more chaos,
with some long-standing price relationships inverted and one of the notable
periods of contango in oil markets of recent years taking hold.
Refined product crack spreads were also volatile, with refiners suffering
from weak margins and reports of voluntary run cuts emerging by the
beginning of 2009.
And even though the downward ride on the roller coaster happened at even
more breakneck speed than the preceding ascent, it is worth remembering that
oil prices averaged around $100/b for the whole of last year -- a hefty bill
to pay for consumer countries already struggling with the deepening
recession.
No single player or stakeholder in the oil market can claim to
exercise much control over prices, but all are hostage to its vagaries.
Most obviously, consumers have been buffeted, initially by the high oil
prices themselves and then by the general economic downturn.
Demand is set to fall this year, and will probably remain sluggish at best
in 2010.
Just as importantly, the collapse in prices seen in the latter months of
2008 and the rapid deterioration in the financial climate are causing oil
companies to rethink investment plans, with signs of reduced budgets and
delayed projects sparking fears of a possible shortage of supply.
Towards the end of the first quarter, crude prices remained relatively calm,
albeit at a level which most in the industry insist is too low to encourage
the investment in future capacity which will be needed once the world
economy picks itself up again.
OPEC has reasserted some semblance of control over prices after slashing
production by a record amount since late 2008.
Prices remain lower than its members would like, but are perhaps better than
they feared they might be three months ago.
Now all they need is for the biggest global recession of the last 50 years
to come to a swift end.
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