Top 10 reasons why 2011 isn't 2008 for oil markets
Oil prices are heading toward USD 100 a barrel again, just over three years after they first touched triple digits on the first trading day of 2008.
January 04, 2011 / 08:27 IST
Oil prices are heading toward USD 100 a barrel again, just over three years after they first touched triple digits on the first trading day of 2008.
Analysts are not expecting a replay of 2008, however, when prices roared to a record high over USD 147 a barrel before crashing down below USD 33 at the end of the year.Below is a factbox on major differences between the current oil market situation and three years ago.Spare oil production capacityMarkets have a greater supply cushion in 2011 than they did in 2008. Analysts estimate OPEC has extra capacity of between 5-6 million barrels per day (bpd) of output it could bring on, primarily from Saudi Arabia, to cool off overheated markets, according to a Reuters poll.Spare OPEC capcity had dipped to around 1.5 million bpd in 2008, but Saudi Arabia has since brought on new capacity. In addition, Iraq, which is not subject to OPEC production ceilings is expected to add 400,000 barrels per day of output in 2011, according to government officials.Spare oil refining capacityLimited spare global refining capacity also helped push up prices in 2008, but since then significant extra capacity has been added in emerging markets such as India and China. In addition, US refiners have capacity shut in due to low margins, which could be brought back online if needed.Global refining capacity rose by 2.2% in 2009, supported by a nearly 600,000 bpd rise in India and a 800,000 bpd increase from China, according to the 2010 BP Statistical Review.In addition, more complex refining capacity has been added to the market, capable of refining lower-quality crude. In 2008, a lack of desulpherization capacity helped drive up prices for higher quality crude needed to produce lower sulphur products.InventoriesCrude stockpiles held by OECD countries have jumped since 2008, giving the group more padding to compensate for any supply disruption. OECD days of forward demand cover hit 60 in the third quarter of 2010, up from 53 days three years ago, as the economic crisis hit demand. Global demandWhile global demand fell in 2008 from record highs in 2007, consumption rebounded strongly in 2010 and is expcted to rise by 1.43 million bpd to a record 87.78 million bpd in 2011.Analysts polled by Reuters in December estimated demand rising to 88.6 million bpd.Resource nationalismResource nationalism among oil-producing nations was on the rise in 2008, with governments cutting back supplies to increase prices, taking larger stakes in projects and revising terms for current and future projects.Countries such as Venezuela and Russia, which were at the fore of the movement in 2008, currently are seeking greater foreign investment as part of efforts to boost oil output.The dollar isn't fallingA drop in the dollar against the euro to record lows in 2008 helped drive oil's rise to record highs, boosting commodities denominated in the greenback.The dollar firmed in the fourth quarter of 2010, however, due to eurozone sovereign debt woes and expectations of a stronger US economy, adding another potential check to rising oil prices.The dollar and oil prices showed a strong negative correlation for much of 2010, reaching nearly 75% in November on a 25-day basis. The negative correlation eased in December, however, dipping to under 17% in thin holiday trade at the end of the month.Subsidies have been reducedFuel subsidies in key emerging economies such as China and India, the backbone of global demand growth over the past decade, have been reduced since 2008, exposing consumers there to higher costs to help check runaway consumption.China hiked fuel prices in 2009, after averaging 7% annual oil demand growth 2004-2008, as part of efforts to curb wasteful consumption. Petrol prices in India have risen 17% since deregulation in June.Peak oilConcerns oil had neared peak global production levels helped drive up prices in 2008, led by gains in the far end of the futures curve.Increased production from unconventional in countries such as Canada and deepwater plays such as Brazil have since have eased this concern, helping ease concerns about future supply.Total proved oil reserves, incuding Canadian oil sands, rose from 1,475.7 billion barrels in 2008 to 1,476.4 billion barrels in 2009, according to the BP 2010 statistical review.Markets are also keeping an eye on growing production for US shale oil deposits, which could raise supplies and ease prices in the giant US market as shale gas did for natural gas markets.Natural gas is cheap, and will remain soPrices for US natural gas, which competes with refined products, are about half the average of USD 8 per million British termal unit seen in 2008, due mainly to the explosion of production from US shale.According to the latest estimate from the US Energy Information Administration, total marketed US natural gas production in 2010 rose more than 3% to 22.66 trillion cubic feet, the highest level since 1973.Investors go active, seeking alphaInvestors are now investing in commodities in order to chase absolute returns, as opposed to seeking to diversify their portfolios as in 2008. To increase alpha, they are taking a more active approach to managing their commodities exposures, compared with the huge cash pushed into passive, long only investments in the run up to 2008.According to Barclays Capital, 43% of commodities investors will be seeking to invest in the asset class through actively managed portfolios in 2011. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
