This year will likely see a transition of energy markets back to "traditional fundamentals" of supply, demand, and inventories in place of the financial, currency, and equity market drivers that dominated 2009, said Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC.
"This would mean that rallies in the oil price above $80/bbl will only become sustainable in 2011," he said. Deutsche Bank analysts also expect natural gas prices to average $6/MMbtu in 2010 and remain close to that average in 2011-12.
Oil prices in early January hit their highest levels since October 2008, peaking $10-12/bbl above December lows, as a result of rising equity markets, a weakening US dollar, and extreme winter weather over most of the US—indeed, much of the Northern Hemisphere.
While it's possible to explain the recent rise in oil prices, said analysts at the Centre for Global Energy Studies, London, "It remains difficult in our view to justify the base from which it rose. Dated Brent averaged $75/bbl in December, a price level that is hard to explain given that the recovery in oil demand has been weak and inventories remain very high, China excepted. Crude stocks at Cushing, Okla., the West Texas Intermediate contract's delivery point, are at a record high, for example, and the small draw in middle distillate stocks in the US for the week ending Jan. 1, despite the cold weather, suggests that tertiary stocks (those held by the end consumer) are still substantial. Had inventories come under serious pressure, then the contango in the oil futures market would have flattened noticeably, but there is little evidence of this." CGES analysts acknowledged, "The global economy is finally in recovery mode thanks to a veritable flood of cheap government money and fiscal stimulus programs in 2009, but the cost of generating the rebound will become increasingly evident during the course of this year and a growing awareness of this could lead crude prices lower, especially after the cold snap comes to an end." They said 2010 likely will present "its own set of debt-related challenges that will threaten the economic recovery."
In Arlington, Va., analysts at FBR Capital Markets & Co. said, "Overarching concerns about the value of the dollar and the ever-present global geopolitical risk only add to our bullish secular outlook." However, they warned, "It is important to keep in mind that increase in global environmental stewardship could cause near and intermediate-term upward pressure on the value of all hydrocarbon-based commodities; longer term, it could cause structural downward demand pressure."
Market forces
Some of the market forces that recently drove up energy prices are likely to be less supportive over the remainder of the year, Sieminski said. "We expect the US dollar will strengthen in anticipation of [Federal Reserve interest] rate hikes," he said. "Moreover, in terms of physical fundamentals, we believe the high levels of oil inventories in the US and across the Organization for Economic Cooperation and Development will be the Achilles heel for oil prices during 2010. Indeed, we find that the high level of Petroleum Administration for Defense District 2 inventories [in the Midwest] means the flattening in the crude oil forward curve may be difficult to sustain. We believe oil prices are therefore in danger of moving into overbought territory." The International Energy Agency in Paris reported global crude production increased 270,000 b/d to 86.2 million b/d in December with higher output from the Organization of Petroleum Exporting Countries and non-OPEC producers. OPEC production increased 75,000 b/d to 29.1 million b/d in December, putting spare capacity at 5.4 million b/d.
Deutsche Bank expects global oil demand to increase 1.3 million b/d this year, the same amount it declined in 2009. "Most of that growth should be in the non-OECD nations. Oil demand growth of 1.3 million b/d is consistent with global gross domestic product growth of 3.5%," said Sieminski. He noted, "Land-based OECD oil stocks are falling, but overall levels remain ample. Crude inventories are back to normal levels, but middle distillate stocks are exceptionally full. Floating inventories of both crude and distillates remain abundant."
Deutsche Bank analysts expect the Environment Protection Agency to approve a five percentage point increase in ethanol blend in US gasoline around midyear. "We estimate that this will increase US ethanol demand by an additional 7 billion gal and sustain strong demand side fundamentals for corn. Indeed on our estimates the proportion of US corn production employed in the US ethanol industry will rise to almost 40% by 2012," Sieminski said.
(Online Jan. 18, 2010; author's e-mail: [email protected])
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