WILL SUPPLY KEEP UP?
While the highly touted revival in global oil demand never materialized, at least in the United States, which still accounts for about 23% of total world consumption, non-OPEC supply surprised to the upside in 2009, a trend that is likely to continue in 2010.
Both U.S. and Russian production far outstripped forecasts and the surprise supply story became apparent late in 2009.
U.S. production is poised to post a 6.4% increase in 2009 and appears set to do so for at least the next several years with the primary driver being output in the Gulf of Mexico. Through October 2009, U.S. oil production averaged 5.268 million barrels per day, the highest level of output since 2004. In percentage terms, 2009 would be the largest increase in U.S. oil production since 1970, according to Platts’ estimates.
Russia’s crude oil production totaled 9.88 million barrels per day (b/d) in 2009, a 1.3% increase year-on-year, preliminary data by the energy ministry’s Central Dispatching Unit showed Jan. 2, 2010. In December, Russian crude output jumped 4% on the year to 10.01 million, after achieving record highs in the previous four months.
EIA is projecting OPEC supply to increase 1.07 million b/d to 35.05 million b/d in 2010 in response to an expected rebound in demand, but output is always readily adjusted by the producing group in response to the global economy, prices and shifts in stocks. OPEC signaled at its final meeting of 2009 that prices between $70-$80/barrel were, acceptable, but that too could change if the dollar appreciates as is expected. A stronger dollar would make lower oil prices acceptable since terms of trade would be more favorable for oil producers.
GASOLINE & DISTILLATES
A stronger U.S. dollar will arrest deteriorating terms of trade for oil producers, while dampening demand for net petroleum importers. While traders can’t rule out a run at the $90 per barrel level as demand starts to recover in the mature OECD economies, a recovery in the greenback will temper rallies in global oil markets (see “The biggest fundamental”).
More importantly, and key to gasoline demand, will be high levels of unemployment that are likely to persist throughout 2010. While the pace of job losses in the United States slowed by the end of 2009, America had yet to see job creation. The same was true in the UK, Europe and Japan.
Gasoline demand may be held in check by high levels of unemployment, while refiners have attempted to manage inventories by slashing output of product to prevent a run-up in oil stocks. The inventory overhang that was evident by the third quarter of 2009 started to erode by the end of the year as a result of lower refiner output. This has put a floor in prices, but does not necessarily portend run-away product markets in 2010.
Should refiners keep output levels of gasoline low through the first two quarters of 2010, prices for the front-month RBOB contract on Nymex could see a pop to the $2.54 per gallon level, or the 61.8% retracement of the move to 78.50¢ from a record-setting $3.631 seen in 2008. Low output combined with a recovery in demand would be the perfect combination for higher gasoline prices, but again, high levels of unemployment are apt to temper consumers’ discretionary spending habits.
The more daunting inventory overhang still resides in middle distillates, diesel and heating oil, the victim of a slowdown in global trade and a lack of trucking and rail traffic as consumption fell off a cliff — a recession-induced occurrence. But an abnormally cold winter in the Northern hemisphere put a floor in the price of heating oil and gas oil, as inventories suddenly started to erode at a fast pace. Between the uptick in demand for winter fuels and low refiner output, prices are not apt to undergo a violent pullback. But the window for winter fuels demand continues to narrow, leaving shifts in diesel consumption as the primary driver of middle distillate prices.
Prices are also not likely to spike given swollen diesel inventories, where most of the surplus resides.