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.
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