The days of cheap U.S. dollars will grow dimmer by the second half of 2010, a game-changer for oil producers and consumers alike, if ever there will be one.
A beleaguered U.S. dollar proved a boon to net importers of oil in 2009 as central banks slashed inter-bank lending rates overnight in an attempt to combat the worst financial and banking crises since the Great Depression (see “What next?”). Central banks will assuredly look to mop up excess levels of liquidity in 2010 as the global economy recovers.
While consumption in the mature OECD economies never rebounded in 2009 to the extent expected, newly industrialized countries such as China and India were more resilient, preventing demand from deteriorating at an even faster pace than the one seen in 2009.
U.S. product stocks fell a cumulative 50.11 million barrels to 721.69 million barrels in the fourth quarter, according to data from the Energy Information Administration (EIA), leaving inventories 30.52 million barrels above the five-year average and 30.05 million barrels above year-ago levels. That looks like a hefty surplus against the averages, but that compares to the start of the fourth quarter, when product stocks were 72.464 million barrels above the five-year average and 109.5 million barrels above the previous year.
For product stocks to draw throughout the fourth quarter is not unusual because it is the highest demand period of the year. But the highly anticipated revival in oil demand did not play out as the U.S. economy continued to limp along. The rapid-fire decline in U.S. product inventories was the result of refiners slashing output to offset the ravages of demand deterioration.
EIA projects total U.S. oil demand will average 18.70 million barrels per day for all of 2009, according to its November short-term energy outlook, an 800,000 barrels per day decline year-over-year, in line with the International Energy Agency estimate for the United States at 18.72 million, a drop of 780,000 from 2008 (see “Higher demand, but how much?”).
From there the two agencies diverge on where oil demand is headed in 2010.
EIA expects U.S. oil demand to average 18.97 million barrels per day in 2010, a 270,000 barrels per day increase year-over-year, while IEA in its December monthly oil report estimated U.S. oil demand at 18.86 million barrels for 2010, which would be an increase of 140,000 barrels.
More glaring were the two agencies’ estimates for total global oil demand. EIA expects total world oil consumption of 84.12 million barrels per day in 2009, a decline of 1.66 million year-over-year, while the IEA projection of 84.86 million for 2009 would be a drop of 1.36 million from 2008.
The contrasts in the two agencies’ projections for 2010 are even more divergent, as was the case in 2008. EIA estimates that total world oil consumption in 2010 will be 85.22 million barrels, an increase of 1.1 million year-over-year, while IEA expects global demand to average 86.33 million barrels, which would be an increase of 1.47 million in 2010. The two sets of demand projections diverge by 1.11 million barrels per day for 2010. IEA’s higher demand estimates seem predicated upon greater consumption growth in the non-OECD regions.
Chinese oil consumption in the first 11 months of 2009 was 7.79 million barrels, 4.1% higher than the same period in 2008, according to Platts’ estimates. But even if this rate of oil consumption fell far short of IEA and EIA estimates for 2009, IEA projected Chinese oil demand for 2009 to average 8.4 million while EIA was anticipating 8.21 million.
That global demand fell short of estimates for 2009 suggests the same may be true for 2010 given that mature economies are expected to rebound, but the recovery is expected by economists to be shallow and joblessness will likely remain a serious deterrent to any pick-up in oil demand.