Home' Australian Resources and Investment : March 2010 Contents 166 • MARCH 2010 • AUSTRALIAN RESOURCES & INVESTMENT
Since October 2009 oil price growth has been hamstrung, with
prices tracking sideways over the past four months (see Graph
1). Concerns surrounding the very large surplus in the oil
market have tempered price rises, while any moderation has
been limited by short‐term investor optimism and occasional weakness
in the US dollar. In month average terms, the price of West Texas
Intermediate (WTI) rose 5.1 per cent in January, averaging around
US$78 per barrel.
While Tapis prices rose more modestly in the month, by 1.3 per
cent, they are currently retaining their trading premium to WTI -- a
reflection of the higher quality of this Malaysian sweet and light crude
benchmark. Brent prices rose by 2.4 per cent in January, trading at an
average price of US$76.60 per barrel in the month. As we have noted
since early this year, the global economic recovery is likely to be a
gradual process and, in trend terms, oil price movements have come to
reflect this view. Indeed, substantial headwinds to growth are expected
to linger for some time, in the form of weak labour markets, more
restrictive future government policy and further financial de‐leveraging
by households and businesses.
GLOBAL OIL DEMAND REMAINS WEAK
Demand conditions in the oil market remain weak. While growth in
non‐Japan Asia has recovered faster than expected, industrial
production in most large developed economies continues to only display
modest signs of recovery. In addition, global transport activity
continues to languish as households in many economies face ongoing
hardship and businesses attempt to reduce costs.
In the January NAB Oil Market Report, the International Energy
Agency (IEA) left their forecast for global oil demand in 2009 and 2010
little changed. This reflected strength in non‐OECD countries offsetting
weaker European and North American demand conditions. The IEA
currently anticipate demand averaging 84.9 mb/d in 2009 before
picking up to 86.3 mb/d in 2010. For oil products, current weak demand
in North America entirely owes to the US, with both Mexico and Canada
reporting positive demand growth. Nevertheless, while still contracting,
inland deliveries of oil products in the US are showing signs of
improvement (on a trend basis).
Much has been made of the role of the colder than expected
northern hemisphere winter in sparking the rise in oil prices over
late‐December and the first week of January. In the US, the National
Oceanic and Atmospheric Administration reported that temperatures in
December were 3.2 degrees F below average. However, the IEA have
been quick to emphasise the relatively small contribution of heating as
a source of OECD oil demand, especially as consumers exhibit a
heightening preference for 'cleaner' sources of energy such as natural
gas. Despite temperatures over 2 degrees F cooler than the previous
December, US heating oil deliveries were around one third lower in
Sales of passenger motor vehicles in China picked up noticeably
over 2009, partially owing to the introduction of government incentives
as the growing middle class embark upon car ownership (see Graph 2).
Most effectively, the government cut the sales tax on motor vehicles
that have engines smaller than 1.6cc from 10 per cent to 5 per cent.
While, in itself, increased car sales will translate into an increase in
refined oil demand, the fact that the flow of vehicles entering the
market consume fuel less intensively means that the impact on oil
markets has been less pronounced than otherwise expected. This was
seen by motor gasoline demand in China increasing by a relatively
modest 3.2 per cent in 2009. In addition, reports of strong refinery runs
causing an increase in gasoline supplies in China raises the possibility
of weaker Chinese oil imports (albeit from very strong levels) over the
coming period (Graph 3).
GRAPH 2 CHINA - PASSENGER CAR SALES
GRAPH 3 CHINESE OIL IMPORTS
The upward pressure on the oil price in the opening weeks of
January was also a result of strong investment demand in the market.
By early January, the Organisation of Petroleum Exporting Countries
(OPEC) reported that money managers had increased net long positions
by over 70 per cent from the start of December 2009.
GLOBAL OIL SUPPLY EXPECTED TO FALL IN 2010
Data released during the month showed that global oil production in
December 2009 rose by 270tb/d to 86.2mb/d.
Nevertheless, the IEA estimates that over 2010 non‐OPEC supply
will fall to 70.2mb/d from 70.6mb/d in 2009. This decline is mostly
attributable to falling oil production in Europe.
OPEC crude oil production rose to 29.14mb/d in December 2009, an
increase of 78tb/d from the previous month. For those countries
governed by production targets, increased oil supply caused their
compliance rate to fall to 58 per cent in December, down from 60 per
cent one month earlier. The rise in supply was largely attributable to
increased production in both Nigeria and the United Arab Emirates
where oil supply increased by more than 40tb/d each.
Part of the increase in Nigerian production relates to some easing
of tensions between the government and the Movement for the
Oil Markets on a slippery slope
MINERALS & ENERGY: BEN WESTMORE
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