Front-month oil prices fell in mid-February to the lowest closing since late December on the New York Mercantile Exchange but at the same time increased on IntercontinentalExchange futures in Europe, widening the spread between West Texas Intermediate and North Sea Brent.
The March contract for benchmark US light, sweet crudes dropped to $33.98/bbl Feb. 12 on NYMEX, while the April contract declined to $42.17/bbl. In London the March IPE contract for North Sea Brent crude increased to $44.65/bbl.
Analysts on both sides of the Atlantic noted the $10/bbl spread between the two crudes and the $8/bbl spread between the March-April NYMEX contracts, increasing the contango in that market while the Brent contango narrowed to less than $1.50/bbl.
“The differential between WTI and carrots is currently as well defined by arbitrage as is the WTI-Brent differential,” said Paul Horsnell at Barclays Capital Inc. The two price spreads along with premiums commanded by Gulf Coast crudes over WTI “are all strong indications that WTI is not currently even a good benchmark for the totality of the US market, let alone the global market,” he said.
Lower NYMEX prices were largely the result of a record 34.9 million bbl of crude in storage at the Cushing, Okla., delivery point. It is likely to test its maximum capacity estimated at 37-39 million bbl.
Meanwhile, Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, predicted WTI will average $43/bbl in 2009 with Brent at $45/bbl. He said “A sharp recovery in oil prices toward $80/bbl in 2011 is possible, but dependent on a strong economic revival starting in 2010.” However, he said odds favor a prolonged period of sluggish economic growth.
John Waterlow, principal demand analyst for Wood Mackenzie Ltd., Edinburgh, reported, “The outlook for oil demand over the next couple of years is the weakest we have seen for decades.” WoodMac predicted global gross domestic product will contract by 0.6% in 2009, leading to lower global oil demand of 84.3 million b/d, down 1.5 million b/d from 2008. It is forecasting “a deeper and longer recession” lasting far into 2010.
US oil demand is expected to fall by 700,000 b/d in 2009. “We anticipate the recession will be longer and deeper than previous estimates as the crisis worsens. We believe that the chances of anything more than a very slight recovery in 2010 are remote,” WoodMac analysts said.
They said European economies are among the most seriously affected by the global financial crisis and declines in oil demand will be much more apparent in 2009 and 2010. “With a contraction in average European GDP of 2.3% in 2009 and an even larger fall in the large, mature economies, we now expect oil demand to be 15.3 million b/d in 2009, equating to a fall of 3.9%, while demand in 2010 is forecast at 15.0 million b/d, a further drop of 2.2%.”
Government stimulus
The market’s negative reaction to “a less than fully developed and inadequately funded [US] financial rescue plan” is a clear indication of the extent to which recovery is tied to progress in fixing a dysfunctional financial sector,” Sieminski said. “As we see it, governments will need to marshal considerably more resources than are politically palatable currently to deal effectively with the current crisis. A growing likelihood that they will fail to do so soon points to a slow and bumpy ride ahead.”
He predicted, “A potential series of fiscal stimulus packages will be confronted by ongoing fierce financial headwinds. We now expect average global growth to fall by 0.2% in 2009, with the Organization for Economic Co-operation and Development nations plummeting 2.7%, and the non-OECD countries growing at only about 3.4%.
WoodMac reported, “The initial wave of stimulus packages do not appear to be sufficient to offset contraction in growth this year. With the exception of India and Brazil, virtually all countries are experiencing either an outright recession or a growth recession. The rapid deterioration in growth in China coupled with further contraction in industrial output in Japan have meant that the Asian ‘tigers’ have been unable to quarantine their economies from the financial crisis.”
Sieminski said, “Despite the unrelenting market focus on demand at this point, concerns about the impact of low prices on the oil supply outlook are growing. We see non-OPEC supplies falling by 200,000 b/d in 2009, but with world gross domestic product growth likely to be negative, demand estimates continue to fall faster than supply forecasts, keeping pressure on OPEC to cut quotas at least one more time.”
(Online Feb. 16, 2009; author’s e-mail: [email protected])
