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Almost a year ago (actually a week tomorrow) world oil prices reached what would turn out to be their peak: $US147.47 a barrel in New York for the key marker crude traded in America, West Texas Intermediate.
According to forecasters at the time, oil was on the way to $US200 a barrel by the end of the year.
Prices steadied, and then turned lower, then plunged as the gathering recession, credit crunch and then the crisis triggered by the collapse of Lehman Brothers in September flattened everything and gave the world its first synchronous slump in 80 years.
After bottoming out in December-January at just over $US30 a barrel, oil prices have climbed, driven by the weakening of the US dollar, expectations of a recovery in various economies, and speculation as traders fed by cheap money in the US and Europe, have made hay and easy profits.
Prices finished around $US71 a barrel in New York overnight.
But whereas a year ago gloom and doom were the order of the day, now there are expectations that the terrible recession has rescued us from the long forecast global oil supply crunch.
"The deep economic recession that has spread worldwide in the past year has taken a severe toll on oil demand," the IEA said in its Medium Term Oil Market Report.
"This scenario paints a delayed picture of threatened 'supply crunch' later in the projection period."
The recovery in world prices to around $US70 a barrel gives producers and consumers just enough incentive either way to go on looking for oil, or to continue pursing energy conservation measures.
And, with the recession curbing energy demand because of low demand and low levels of output, there's an extra bonus from the enormous revamp that the world car industry is undergoing.
There's also the unpleasant assumption in the IEA forecast that global economic growth won't be all that strong up to 2014 and if it’s very weak, consumption could fall.
That's not a particularly encouraging outlook, especially for employment.
This week the International Energy Agency (IE) cut its medium-term demand forecasts for oil (and gas) for the second time in a year.
The IEA said it now expects global oil demand to grow a paltry 0.6% or just 540,000 barrels/day over 2008-2014, pushing consumption from 85.8 million b/d to 89m b/d.
That is considerably less than 1m b/d average yearly increase the IEA had expected last year.
If the lower-end GDP forecasts turn out to be correct, oil demand could actually fall over the period, with consumption down to 84.9m b/d in 2014.
It is the second time the IEA has been cut its forecasts: in 2008, it estimated that daily oil demand would rise to 94.14 million barrels in 2013.
This was a reaction to the impact of those high prices. This year it’s a reaction to the recession those prices played no small part in intensifying.
The upside from the new forecast is that the spare supply cushion around the world (principally in the OPEC) is now expected to reach 7.67m b/d next year - or some 8% of demand - a long way from the near balance forecast last year of just 1.67 million barrels day.
If accurate this will knock a lot of speculative activity out of the market because it will mean that supply changes caused (as they are currently) by unrest in a producer, like Nigeria, will have less impact with the bigger surplus or cushion.
The does forecast that the spare capacity in OPEC is expected to contract from 2011 onwards, but it won't be as dramatic as in 2007-08.
In fact the IEA reckons OPEC's spare capacity will be five million barrels a day in 2013 (If the global economy doesn't go mad and rebound strongly, which is very hard to see).
In its report, the IEA cautioned about believing in the recent outbreak of economic “green shoots” that have helped push oil prices to their current levels.
”The recent resurgence in economic activity could also simply reflect the rebuilding of depleted inventories across several industries, making it arguably premature to predict an imminent and strong economic rebound, not least because the elimination of spare capacity, the deleveraging of the private sector in several highly indebted countries and the rebalancing of global demand are still at an early stage,” The IEA said.
It's advice that a lot of other analysts would do well to heed.
But supply hasn't escaped the impact of the recession,
"Compared with last year’s envisioned growth of 1.5m b/d in the medium term, total non-OPEC supply is now projected to decline by 0.4m b/d from 2008 to 50.2m b/d in 2014,” the IEA said.
It said this was flowing from oil field investments deferred or cancelled because profit margins have shrunk, or the producers have found they can no longer afford them (their cash flows have tightened), or banks won't lend on developments.
As in the past much of the decline also comes from the production slowdowns of older fields, especially in Mexico, Russia, UK (North Sea) and Norway (Ditto).
The much-touted new Canada oil sands are also struggling to produce because they are expensive.
The IEA cut its growth forecasts production from these Canadian areas by 70% as projects that no longer make economic sense, have been cut or delayed.
At a press conference, Reuters reported that the IEA was still very concerned too rapid an oil price rise could derail any economic recovery and consumer countries should seize the moment to improve energy efficiency.
"We are watching carefully because if the price moves too fast compared to the economic recovery, it could derail the economic recovery. This is something we are very concerned with," Director General, Nobuo Tanaka said.
The IEA cuts are based on IMF economic forecasts which see global economic growth recovering to nearly 5% for the period 2012-14.
The IEA is careful not to predict oil prices, but said it was assuming nominal prices of $US51 for this year, rising to $US59 a barrel next year.
In a statement, Mr Tanaka said:
"Two years of global oil demand contraction in 2008-2009 reflect the worst economic recession in over fifty years.
“Oil prices are around half the level seen last year in July, when they peaked at USD 147, even though they have strengthened again recently, partly due to a perception that economic recovery may be just around the corner”, Mr. Tanaka said, warning that if oil prices rose too rapidly it could damage any such recovery.
“In the natural gas sector, we have moved from a tight supply and demand balance with extremely high gas prices to an easing one with plummeting prices.
"Both markets face enormous uncertainty surrounding the timing, pace and extent of any economic rebound, which affects all prognoses for oil and gas market fundamentals over the next five years.”
Gas, or rather conventional LNG and coal seam gas sourced LNG are both areas of considerable interest in Australia.
Natural gas is the primary basis for pricing and examining demand and the news isn't all that promising.
After a 1% increase in 2008, OECD gas demand fell by 4% during the first quarter of 2009 and is expected to further decline through the year.
The Natural Gas Market Review 2009 projects that for the first time in 50 years, the world will witness a drop in global gas demand.
On the supply side, 60 billion cubic metres (bcm) of LNG capacity are planned to come online this year.
"Yet with spot prices in the United States bottoming out at below USD 4 per Mbtu , the question for 2009 is how rapidly US unconventional gas production -- which is generally higher cost and therefore less competitive -- will decline.
"The combination of weak demand and lower prices could undermine future investments.
"Despite the expected relief on engineering, procurement and construction costs, project sponsors face both financing problems and increasing uncertainty about when and at what pace the economy and therefore gas demand will recover.
"Besides the recession, the increasing awareness of climate change issues puts a question mark on the future role of gas.
"Increased energy efficiency and renewables could put downward pressure on gas demand; but increased wind capacity calls for gas-fired plants as reserve capacity.
"If investments in production and supply infrastructure are delayed, there is a risk in the medium term of tightening markets when demand recovers.
"While liquefaction capacity will see an unprecedented growth of 50% between 2009 and 2013, there will be a dearth of new capacity in the period after 2013 unless new projects are approved in 2009-10.
"The world’s largest producer, Russia, faces considerable challenges, both technical and financial, already leading to project delays." This Information is provided to you by the Australasian Investment Review (AIR).Subscriptions are free.AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decision.
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