Tight fundamentals, difficult geopolitics, and fears that an economic recession will reduce demand continue to worry energy markets.
After falling three consecutive sessions amid continued signs of a slowing economy, crude futures prices rebounded somewhat Jan. 8 when Nigeria’s most powerful rebel force, the Movement for the Emancipation of the Niger Delta, reiterated its objective of halting 2 million b/d of crude exports from that country.
However, crude prices fell again in volatile trading Jan. 9-11 as traders shrugged off an eighth consecutive week of declining inventories and worried instead that a possible recession would diminish demand. The Energy Information Administration said commercial US inventories plunged 6.8 million bbl to 282.8 million bbl in the week ended Jan. 4, well below the Wall Street consensus of a 1.1 million bbl decline. Gasoline stocks jumped by 5.3 million bbl to 213.1 million bbl during the same week, the single largest increase since December 2006. Distillate fuel inventories increased by 1.5 million bbl to 128.7 million bbl. US imports of crude declined by 203,000 b/d to 9.8 million b/d during that same week. However, the input of crude into US refineries increased by 389,000 b/d to 15.8 million b/d, with refinery operations increasing to 91.3% of capacity. Gasoline production increased to 9.1 million b/d while distillate fuel production rose to 4.5 million b/d (OGJ Online, Jan. 9, 2008).
A suggestion by Federal Reserve Chairman Ben Bernanke that more “substantive” reductions of US interest rates may be pending helped slow the fall of crude prices on Jan. 10.
Crude futures prices increased more than $10/bbl in December to $100/bbl during the first trading session of 2008. But in early January, prices moved in a $7/bbl band below this milestone. “Further advances have been resisted by weak US economic data and forecasts of mild weather, both of which point to weaker US oil demand,” said analysts at KBC Process Technology Ltd. in England.
“The rally in crude oil continues to stumble due to concerns over a US recession,” said analysts in the Houston office of Raymond James & Associates Inc. “However, several data points help support the underlying bullish story. Specifically, US crude inventories continue to fall. Crude inventories have now fallen 22 of the last 27 weeks. Also helping to put a floor underneath crude prices is news that China has announced a freeze on gasoline price increases. This price freeze should help ensure that Asian demand for crude and refined products will remain strong,” Raymond James analysts said.
Adam Sieminski, chief energy economist, Deutsche Bank AG, New York, said, “Demand remains relatively unresponsive to higher energy prices due to the growth in real incomes. Prices could be impacted by a global slowdown in gross domestic product, but a worldwide recession does not seem likely.” Deutsche Bank now expects West Texas Intermediate and North Sea Brent nominal prices to average $75/bbl in 2010 and $80/bbl in 2012-13, compared with prior “midcycle” estimates nearer $65/bbl. US natural gas prices are forecast to average $8.75/MMbtu.
China, US drivers
Sieminski said China and US monetary policy should remain the key drivers of commodity markets during 2008. He predicted, “The strength in underlying gross domestic product and income growth across China will remain a major factor supporting commodity prices over the next few years. Indeed, the steady increase in Chinese GDP per capita since 1995 is remarkably similar to the improvement in living standards that unfolded in South Korea and Taiwan from 1980.”
Furthermore, Sieminski said 55% of China’s total population should be in urban areas by 2020, similar to the current urbanization ratio of Malaysia and the Philippines. “Since per capita energy consumption in urban areas is 3.5 times more than that in rural areas, the urbanization trend is generating a sustained period of strong energy demand,” Sieminski said.
He said, “We believe the run-up in oil prices during the fourth quarter of 2007 goes beyond what can be explained by the decline in the US dollar and the level of global growth. However, refinery capacity, oil production constraints, and geopolitical issues continue to play a very important role in boosting prices. We believe it will require some normalizing of these factors to achieve our average crude oil price forecast of $85/bbl.”
Sieminski said, “We expect [natural gas] prices will eventually benefit from inadequate capacity additions from proposed coal projects and wind power, which are required to meet electricity generation needs.”
(Online Jan. 14, 2008; author’s e-mail: [email protected])
