Is Oil Staging a Comeback?

by Inya Ivkovic, MA

According to the Organization of the Petroleum Exporting Countries (OPEC), the global demand for oil is still shrinking, because the
world economy is still contracting. That said, OPEC also believes that the worst for the oil futures market and oil stocks might be over and that things should start improving in the near term. For 2009, OPEC has again forecasted lower consumption rates, expecting a year-over-year decrease of 1.62 million barrels per day to about 83.8 million barrels per day. Interestingly, OPEC’s own output increased last month, albeit only slightly, from 25.78 million barrels a day to 25.9 million barrels per day.

Why this sudden optimism? OPEC believes that a seasonal increase in demand, as well as the cartel’s own efforts to limit the supply, should eventually reduce adverse pressures on oil companies, which have been dealing with peak inventories and low demand for quite some time.

To say that that the oil prices have had a rollercoaster year is putting it mildly. After hitting an all-time high of just over $147.00 per barrel almost a year ago, prices tumbled down violently to about $32.00 per barrel in December. And now they have more than doubled. On Friday, crude oil futures traded around $71.50 per barrel.

As far as OPEC’s efforts to bring a semblance of control to the oil market last year, the cartel’s main strategy was to manage prices by cutting its output. Bear in mind that OPEC is a significant player in the market, controlling 75% of total world production. For example, in September, OPEC cut an equivalent of five percent of daily world demand, offering the support to prices that way. Apparently, concerted efforts to curb the output have contributed to the market turnaround and reduction of peak global inventories.

Another sliver of hope is seen in comparing the outlooks for 2009 of OPEC and the International Energy Agency (IEA). Although OPEC has reduced its consumption forecast by 1.62 million barrels per day below 2008 levels, the cartel’s forecast was still above the most recent forecasts of the IEA, which expects production to decrease by about 2.47 million barrels per day to 83.3 million barrels per day for 2009.

Additionally, the demand that has been decreasing rapidly since  last summer is showing signs of improvement or, rather, the pace of the contraction seems to be moderating, signaling that the oil and oil stocks markets could be returning to their more normal levels by the end of this year, even.

As already mentioned, in May, OPEC increased its output by 0.12 million barrels per day compared to April. This means the group is moving further away from its goal to reduce output, although still remaining compliant with target outputs. If OPEC sticks to it, it could result in gradual, but significant stock draws in the second half of 2009, resulting in higher demand and higher crude oil prices by year’s end.