Market fears drive down prices

Sam Fletcher
Senior Writer

With the loss of public confidence because of the current financial crisis, world demand for energy is still declining even as prices fall.

The Oct. 24 decision by ministers of the Organization of Petroleum Exporting Countries to cut production by 1.5 million b/d effective Nov. 1 failed to halt the price slide. Instead, the average price for OPEC's basket of 13 crudes fell a further 25% Oct. 24-Nov. 17. OPEC ministers were to gather for consultations Nov. 29 at the meeting of the Organization of Arab Petroleum Exporting Countries in Cairo. "But there is little point in pledging new output cuts until those already agreed are implemented," said analysts at the Centre for Global Energy Studies in London.

In the interim, oil demand forecasts are being revised down and a year-on-year contraction in global oil demand in 2008 and 2009 "is now a very real possibility for the first time for 25 years," said CGES analysts.

"It took 40 months for oil prices to rise from $50/bbl to almost $150/bbl and just 4 months for them to fall back again," they said. A series of "psychological" oil price floors have crumbled since early July, and heady forecasts of oil prices above $200/bbl before the end of the year "now belong to a different world," CGES analysts reported.

However, they said, "With people fearful for their jobs and income prospects, a 25-30% fall in gasoline prices will not change their new driving habits." Growing demand for oil in Asia, Latin America, and the Middle East can no longer offset the continuing decline among member nations of the Organization for Economic Cooperation and Development, as demand for Asian-made goods falters and rampant oil demand growth eases in oil-producing countries.

Paris-based International Energy Agency slashed its 2009 demand outlook by 670,000 b/d—the largest cut in 12 years—to 86.5 million b/d, or 0.3% growth, down from its previous estimate of 8% growth. OPEC reduced its 2009 oil demand growth forecast for the third consecutive month, down by 200,000 b/d to a growth of 500,000 b/d for total world demand for 86.68 million b/d in 2009.

CGES was even more pessimistic, however, suggesting that global oil demand will fall in both 2008 and 2009. However, it expects declining demand to be offset somewhat by the lack of growth in non-OPEC supplies. "OPEC's call for support from Russia, Mexico, and Norway in cutting production is already being delivered, albeit involuntarily, with production falling year-on-year in all three countries," CGES analysts said.

"If prices fall far enough, it may be difficult to cover the operating costs of the most expensive non-OPEC production, Canada's oil sands." These costs may be no higher than $30/bbl, "but will fall further as the cost of generating heat for the extraction process falls," they said.

CGES analysts said a new floor price for oil "presumably lurks at the level at which OPEC's members are prepared to sacrifice potential sales and turn customers away unfulfilled, or at which high-cost non-OPEC production begins to be shut in. Oil prices will continue to fall until one of these breakpoints is reached."

Among the incidents to watch, said CGES, are signs of a shut-down of oil-sands production projects in Alberta and OPEC's response to a deteriorating global economic situation and US President-Elect Barack Obama.

Pirates slow supplies
On Nov. 15, pirates hijacked the Sirius Star, a very large crude carrier owned by Saudi Aramco and operated by Vela International, 450 nautical miles off Kenya—the farthest out to sea that modern pirates have ever struck. As company officials negotiated to ransom the vessel with its crew of 25 and a cargo of 2 million bbl of oil, an Indian warship attacked and sank a pirate "mother ship." A multinational naval force is patrolling waters between the Arabian Peninsula and the Horn of Africa where pirates recently have become bolder and more violent.

Still, the AP Moller-Maersk Group, one of the biggest shipping companies with a fleet that includes tankers, plans to route its vessels beyond the Gulf of Aden waterway that the pirates have been raiding. Frontline Ltd. is considering doing the same with its fleet of VLCC tankers.

"If Frontline or other owners embark on the same deviation, it will not only increase voyage time and cost but will also result in a build up of stock at sea that will need to be added to the demand equation," said Olivier Jakob at Petromatrix, Zug, Switzerland. "The longer supply line would also result in a lower stock security cover for Europe."

(Online Nov. 24, 2008; author's e-mail: samf@ogjonline.com)

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