2011: 'Odd year' for oil

In case you didn’t noticed, 2011 was “an odd year”—one of “volcanic change” that yet led to circumstances “conducive” to maintaining consistent oil prices, said Paul Horsnell, managing director of Commodities Research at Barclays Capital, London.

He said, “The contradiction of 2011 is that once the pattern of the key dynamics was set, we have found it a year that has enabled the maintenance of consistent price forecasts for global benchmarks. Stability in price dynamics has coincided with instability in the basic building blocks that help determine the main frameworks for the oil market.”

With the notable exception of West Texas Intermediate, benchmark crudes set record price averages last year, “in most cases well above $100/bbl,” Horsnell reported. The Organization of Petroleum Exporting Countries’ basket of benchmark crudes averaged above $100/bbl for 11 consecutive months and was expected to set a record average. On Jan. 3, OPEC reported an average basket price of $107.46/bbl for 2011, up from $77.45/bbl in 2010. It was the best year ever for OPEC revenues with record prices and record production, including NGLs.

“Despite the significant slowdown in demand growth in the second half of the year, global oil demand, too, is on track to reach a record high, even after allowing for delayed revisions to Organization for Economic Cooperation and Development demand. Meanwhile, although the absolute level of inventories is higher (in line with global oil demand), the rate of drawdown in stocks last year was near record levels,” Horsnell said.

Like most analysts, Horsnell expected a slowdown in world demand for crude compared with the exceptional growth rates of 2010, but demand growth weakened more than anticipated. As a result, Barclays Capital lowered its 2011 global demand growth forecast some 600,000 b/d as the European debt crisis intensified and global demand slowed. “In midyear the flow of data suggested a far more serious weakening was in place, but a stronger outturn in the second half kept the dynamics more positive,” he explained. “No doubt the Fukushima earthquake had a strong negative…effect on global manufacturing, while policymakers on both sides of the Atlantic struggled to maintain growth.” OECD oil demand weakened with higher oil prices and dragged the global growth profile lower.

Distillates outperform

However, Horsnell said, “We did expect the middle of the barrel to outperform, and that it did with élan. Record-high diesel demand, supported by extremely strong non-OECD demand for the middle of the barrel and robust internal trade in the OECD, was the key supportive factor for global demand this year, while gasoline languished in the face of high prices.”

He said, “Any disappointments on the demand side have on average been outweighed by disappointments on the supply side, and in particular the spectacular deceleration in non-OPEC supply after the first quarter started off on a strong note with non-OPEC supply in January increasing by almost 1 million b/d, continuing the momentum seen across the fourth quarter of 2010.” Despite strong growth in production of unconventional liquids, non-OPEC supply growth virtually ground to a halt. Horsnell blamed underperformance in the North Sea, technical issues in Brazil and Azerbaijan, decline rates in China, fires in Canada, strikes in Kazakhstan, and geopolitical disruptions in Sudan, Yemen, and Syria.

“The only bright spot has been the US where the momentum in oil shales has continued to tick higher, helping offset some of the weakness from the rest of the world,” he said.

Rather than becoming more proactive last year, Horsnell said, “OPEC was faced by an unprecedented event in the form of the Arab Spring, the greatest impact of which was to lose more than 450 million bbl of Libyan light, sweet, diesel-rich oil over the course of the year. OPEC was initially slow to react, and this was made worse by its meeting in June, which ended without any consensus or decision. However, part of the problem stemmed from the fact that the quality of the existing spare capacity was heavy and sour in nature, and hence to use it as a replacement for light, sweet crude was simply not fungible.”

He said, “Ultimately, trade flows had to adjust, with more North African crudes swinging into Europe and additional Middle Eastern oil heading towards Asia, but the adjustment was hardly instantaneous. Nonetheless, Saudi Arabia and a few other members such as UAE and Kuwait, which held some spare capacity, unilaterally increased output, with OPEC-12 production currently at a 3-year high above 30 million b/d.”

(Online Jan. 3, 2012; author's e-mail: samf@ogjonline.com)

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