Although there were no production adjustments at their Nov. 29 consultation in Cairo, members of the Organization of Petroleum Exporting Countries did note the rapid deterioration of demand prospects since their Oct. 24 agreement to reduce production effective Nov. 1.
In the Houston office of Raymond James & Associates Inc., analysts saw it as a "clear implication" that another production cut is coming, probably at OPEC's Dec. 17 meeting in Oran, Algeria. Others wonder why OPEC should consider another cut without knowing the extent of compliance with its previous reduction and its effect on oil markets. The last cut did not slow the temporary fall of oil prices to below $50/bbl on Nov. 20; that was the first time since May 2005 that a front-month crude contract dipped below $50/bbl in the New York market. In the past, OPEC hasn't had much luck maintaining prices during a financial crisis.
"World oil markets clearly reflect lack of credibility in OPEC, their ability to adhere to output cuts, and their ability to support their [unofficial] target price of $75/bbl," said analysts at Pritchard Capital Partners LLC in New Orleans.
Raymond James analysts said the oil market apparently has factored into prices a 3-4% decline in global oil demand. "From a historical perspective, that type of demand decline in a falling oil price world just seems too severe. That means we expect oil prices to gradually improve though 2009 as liquidity returns to the commodity markets and global capital infusions begin to drive global oil demand gradually higher," they said.
At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts expect OPEC's production cuts to stabilize prices. "In 2009 the average price of Brent crude oil will be $80/bbl," they said.
"The best cure for low oil prices is…low oil prices," said Raymond James analysts. "As investment in new supply dwindles—both because of more limited available cash flow and also the credit crunch—non-OPEC supply will likely fall, and the prospects for growth from OPEC look anemic as well."
Consequences of $50 oil
Meanwhile, analysts noted various consequences if crude hovers at $50/bbl for a substantial period:
-- Lower prices for transportation and heating energy bring relief to consumers. In Arlington, Va., however, analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) reported signs "that the US driver may be coming back to life." The latest data from MasterCard Advisors indicated US gasoline demand increased 172,000 b/d to 9.2 million b/d in a week. Demand is still down 1.2% from a year ago, but it's a possible start.
-- Lower prices disrupt the budget plans of OPEC countries. "If prices move much below $50/bbl, the alarm bells will be deafening," said KBC analysts. "Spending commitments range from social programs to long-term investments in oil infrastructure that are needed to meet long-term energy demand. Political stability in some OPEC countries might depend on these social programs, and the world's future supply of crude oil and products will depend on these investments in oil infrastructure."
-- It raises doubts about the viability of oil projects both upstream and downstream. At the end of November, the list of deferred and cancelled projects was growing.
"We are witnessing the end of structurally cheap oil and the beginning of structurally higher-priced oil," said KBC analysts. "There is an incentive to invest, but is there the will?"
By 2010, KBC analysts expect a strong recovery in demand "that will be maintained for much of the following decade." Meanwhile they expect conventional crude production in non-OPEC countries to increase until 2020 before going into gradual decline. That will increase world dependence on OPEC suppliers who need to invest to provide more production capacity.
"After 2015, we will need more refining capacity to meet global demand growth," they said. As upstream and downstream spare capacity shrink, KBC analysts expect crude prices to inch up to $105/bbl in 2015 and $130/bbl in 2020.
"The driving force—literally—behind oil demand growth in China and the rest of the developing world is the dramatic expansion of vehicle fleets," said KBC analysts. By 2030 there will be 1.3 billion vehicles from 800 million today, they said.
But new CAFE standards and an apparent "structural move" to more fuel-efficient vehicles have KBC analysts expecting a 2.5 million b/d decrease in US gasoline demand by 2030. Demand for diesel and jet fuel will grow to 2030, but the ratio of fuel growth to GDP growth will fall as more fuel-efficient vehicles and aircraft come into service.
(Online Dec. 1, 2008; author's e-mail: firstname.lastname@example.org)