Oil in a Week - Oil Market Outlook

At this time of the year, institutions focused on oil related affairs issue their studies and their oil market outlooks for the New Year, and even for the year after that. But what distinguishes this year from other ordinary years is the ambiguity that emerged after the global financial crisis, and the successful and radical recovery of some major developed countries from this crisis, and even the noticeable resurgence of economic growth in some cases such as China, for example, while billions of dollars were pumped to bail out the banks threatened by collapse. However, it is becoming increasingly clear that despite these billions, the crisis is still impacting the economies of many major countries. For instance, the United States is still suffering from an employment crisis (around eight million unemployed) that may very well undermine its economic growth, while Britain and Japan, which managed to recover from the crisis, are still in a fragile state of recovery.

In light of these unstable circumstances, the institutions mentioned above are attempting to gauge the oil demand forecasts. We will content ourselves here with the study of the reports issued by OPEC, the International Energy Agency (IEA) and the U.S Department of Energy’s Energy Information Administration (DOE-EIA), the three main reference points in this field.

The forecasts issued by all three organizations are similar, in terms of all expecting a slight increase in demand for crude oil. However, while both OPEC and the IEA point out that the source of this increase will be the economic growth being witnessed in the Asian emerging market countries (China and India), while the DOE-EIA forecasts that the source of this increase will be Europe and the United States.

But despite these cautiously positive outlooks, slight improvements in demand are not enough to explain alone the current trends in oil prices. And despite the general satisfaction regarding the price range of 70 to 80 dollar for the barrel, and the attempt to defend and justify the need to maintain this price range, many other political, economic and natural factors affect prices, not to mention speculation.

At any rate, OPEC estimates that the world economy will grow by 1.3 percent in 2010. Moreover, the organization points out in its reports that the industrialized member countries of the Organization for Economic Cooperation and Development (OECD) are still facing significant challenges. This means that the economies of some of these countries still largely rely on their governments’ huge capital injections.

According to OPEC, global demand for crude oil has shrunk by approximately 1.4 million barrels per day in 2009 compared to 2008; however, the organization forecasts that demand will rise again during 2010 by about 800 thousand barrels per day. OPEC notes that most of this new demand will be the result of China’s economic growth estimated at 8.8 percent, and the growth of the Indian economy estimated at 6.7 percent. However, OPEC notes at the same time that markets are apprehensive of the increase in inflation in China, which can have a negative impact on economic growth. The organization also expects that global demand for OPEC oil will stabilize at 28.6 million barrels per day, which was approximately the same rate of demand for the organization’s oil in 2009.

In the meantime, the IEA mentioned the following regarding the trends of [oil] prices during the coming period: “There is a possibility that demand for oil will rise by about 1.4 million barrels per day in 2010, if the recovery of the global economic growth continues. Non-OPEC output may be able to cover this increase in demand, which means that OPEC’s production rate will be the crucial factor in achieving balance in the markets”. The IEA then adds in its report: “OPEC’s decisions this year will factor in the need not to push prices to very high levels, in order not to cause any setbacks to the recovery of the global economy”.

For its part, the DOE-EIA’s report forecasted the following: “World oil consumption will grow in 2010 by 1.1mn b/d over the 2009 average forecast of 84.12mn b/d to 85.2mn b/d.” But unlike OPEC’s and the IEA’s forecasts, the EIA believes that “most of this increase in demand will occur in the countries of the OECD”. The EIA thus estimates that demand will increase by about one hundred thousand barrels per day in the countries of the OECD, while it believes that oil demand in the United States may increase by 270 thousand barrels per day.

*. Mr. Khadduri is an energy expert