Energy prices surged upwards on Feb. 10 as the Paris-based International Energy Agency increased its forecast for 2005 oil demand growth by 80,000 b/d to 1.52 million b/d, for a total of 84 million b/d.
IPE also reported that second-quarter demand for crude from the Organization of Petroleum Exporting Countries likely will exceed supply for the first time in more than 2 years. In its latest monthly report, IEA revised its projected call on OPEC crude upwards by 100,000 b/d for 2004 and by 300,000 b/d for 2005, averaging 28.2 million b/d and 28.3 million b/d respectively.
“The seasonal uptick in fourth quarter demand for both years is now more pronounced than in last month’s report. For the current quarter, lower expectations for non-OPEC supply are the key reason behind the higher call. Furthermore, the first quarter call is now running some 300,000 b/d above January’s observed OPEC output,” IEA explained.
It further noted that OPEC production has fallen by 770,000 b/d to 28.8 million b/d as members curbed overproduction. “Iraqi supply fell 160,000 b/d amid continuing export disruption,” IEA reported. Crude prices continued to climb Feb. 11.
Demand remains robust
In a Feb. 9 report, Paul Horsnell of Barclays Capital, London, noted that total US oil demand growth remained robust in January, averaging nearly 20.8 million b/d, representing a growth of 375,000 b/d from year-ago levels. The “tentative” indication of the demand for February was more than 21 million b/d, up by 515,000 b/d from 2004. “The weekly level of implied demand has been above 21 million b/d for 2 weeks out of the past 3 (and in the other week it was an extremely near miss at 20.957 million b/d),” Horsnell said. “Gasoline demand is at its seasonal low in absolute terms, but the [year-over-year] growth was reasonably robust at 113,000 b/d in January, with a first indication of 94,000 b/d growth in February.”
Horsnell therefore dismisses what he describes as “a growing sense of US demand pessimism” that stems from “sentiment rather than data, being largely based on the argument that ‘weather has been mild in recent weeks, so demand must be very weak’.” Instead, he said, “We see the core argument as being that the underlying rate of demand growth is extremely strong, and colder-than-normal weather would have stoked the numbers up even more.”
Market price band
Meanwhile, Horsnell said, the market has “de facto created” its own price band for West Texas Intermediate after OPEC at its January meeting formally acknowledged it has abandoned its target price band of $22-28/bbl, which it hadn’t enforced since December 2003.
Since the end of November, the price for WTI on the US spot market and for its futures market equivalent on the New York Mercantile Exchange has remained in the band of $40-50/bbl. “It has strayed into the last 25¢ of that band on a few occasions at both the top and the bottom, but even intraday the range has held,” said Horsnell.
“Further, we believe that [OPEC] has chosen the correct band,” he said. “There is considerable resistance close to $40[/bbl], since it is assumed that should prices show any momentum that is likely to create a drive through that level, then (to use the terminology of the US Federal Exchange) the bias of OPEC will swing toward cutting [production]. Likewise, it is perceived, and in our view correctly, that the bias would swing at least towards keeping oil on the market should too determined an assault on $50[/bbl] occur. So, for the moment at least, the $40-50[/bbl] is holding.”
Horsnell observed, “The more that prices fall towards $45[/bbl], the more that sellers start to become willing buyers, given the constriction in the available downside. The upside is usually harder to defend than the downside, but short of a sharper tightening in the data or a further speeding up in geopolitical developments, the $40-50 band is where we are most likely to be.”
Further, he said, “As producers are happy between $40-50[/bbl] and consumers are learning to live with it (and indeed to find it not so bad), the range is already beginning to gain an aura of potential solidity.”
Horsnell pointed out, “Normal weather would have been enough to drive prices will above $50[/bbl] recently, and geopolitics and global market tightness can still achieve that. By contrast, unless something fairly major comes out of left field, we are not certain who would currently want to be a seller below $42 or $43[/bbl], particularly with an OPEC meeting due within 5 weeks.”
(Online Feb. 14, 2005; author’s e-mail: [email protected])
