ANALYSIS: Where Are Oil Prices Headed?

director of global oil fundamentals for IHS/ CERA

Robust worldwide demand, along with the lack of Libyan output, will keep crude oil prices trending above $100 per barrel for some time to come, according to a review of current statistics from Rigzone and interviews with leading analysts.

"From a long-term perspective, we're just in a different world than we were in the 1990s, when there was $10 to $20 oil," commented Ruchir Kadakia, director of global oil fundamentals for IHS' Cambridge Energy Research Associates (CERA.)

"Between 2003 and 2008, demand really skyrocketed. In 2004, there was demand growth of 3 million barrels per day. That was pretty phenomenal."

A major driving factor in vigorous demand growth was and is China, with its continuing demand for more cars, Kadakia noted.

EIA Oil and Gas Supply and Demand

From 2005–2008, oil producers responded by ratcheting up supply.  However, during that time, production cost indicators more than doubled for 28 key CERA marker projects over the world, Kadakia observed.

Then, credit and housing markets collapsed, taking oil prices down with them, plunging from a high of $147 per barrel in mid-2008 to the $30's by early 2009. Yet, the cost index to produce oil dropped only 12 percent, according to IHS/CERA.

Oil Prices Plummet Early In 2008 Recession

"There was just no place for all that production to go," Kadakia said. "Demand is so elastic. Supply is a three- to five-year response."

Some traders responded to the worldwide recession and plummeting oil prices by taking crude off the market and storing it in tankers, hoping for better times ahead, Kadakia explained. This is known as arbitrage.

Today's Fundamentals

Better economic times are here again, and with them oil prices and demand remain strong – if day-to-day volatility does occur.

According to May 10 statistics from the U.S. Energy Information Administration [EIA], total world oil consumption will grow by 1.4 million bpd (barrels per day) in 2011. Although this is about 0.1 million bpd below last month's EIA Monthly Energy Outlook, the agency predicts demand growth of 1.6 million bpd in 2012, slightly higher than forecast in April.

Meanwhile, supply from non-OPEC countries should increase by an average of 0.6 million bpd annually through 2012, EIA said. The preponderance of supply will come from Brazil, Canada, China and countries of the former Soviet Union, EIA forecasts. 

"EIA still expects that the market will rely on both inventory drawdowns and increasing production of both crude oil and non-crude liquids in OPEC countries to meet projected demand forecasts," the agency said. However, unrest among OPEC producers and unbridled growth in China are among the factors that add uncertainty to the forecast, EIA said.

EIA expects oil prices to remain strong, with West Texas Intermediate spot prices averaging $103 per barrel in 2011 and $107 in 2012. These prices, however, are down about $4 and $6 per barrel, respectively, from the prices in April's Short-Term Energy Outlook.

"World demand for oil continues to boom," said John Felmy, chief economist for the American Petroleum Institute [API.] "At 87.9 million barrels, it's at an all-time high and the International Energy Agency [IEA] expects demand of 89.4 million barrels [per day] this year."

"Is It the Real Price?"

Said API's Felmy: "On a day-to-day basis, futures traders are reacting to all the data. Ultimately, in oil markets, when the futures market closes, they have to make and take their contracts or roll."

"Is it the real price?" he asked. "I tend to say that it is."


John Felmy, chief economist, American Petroleum Institute [API]
John Felmy, chief economist, American Petroleum Institute [API]

"In China, they buy more cars than we do. There's high demand in China, but in America, we had the shut-down in the Gulf of Mexico [after the Deepwater Horizon disaster]. Libya is another couple of percent. It's a tight, tight market. It's a 32 billion barrel market for oil. It's a huge, huge market."

Underconfident Market

This might be a "huge, huge" market, but it's neither very confident nor stable yet at futures prices of more than $100 per barrel. On any given day, the price might "plunge," as the Houston Chronicle recently headlined, to under this level.

On Wednesday, for instance, the New York crude oil futures market took a dip to $92.40, upon news of separate EIA stats showing large increases in both crude oil and gasoline inventories, a sign that consumer demand is slackening in protest of high oil prices. Gasoline futures in New York also softened to only $3.12 a gallon on the news, reported the Los Angeles Times.

"Consumers will likely need to observe a steady descent in the cost of fuel before sentiment will see an increase," said Joseph Brussuelas, senior economist from Bloomberg LP in New York, in a story on the Bloomberg wire.

High energy bills serve as a "reminder for beleaguered consumers day to day of what has been a difficult economic recovery," Brussuelas continued.


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Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
Lou | May. 23, 2011
With both supply and demand elasticity taking hold worldwide, gasoline down to $2.50 per gallon by the end of 2011 should not be a surprise.

Burt | May. 21, 2011
Its mostly about Money. Who gets the biggest cut? If government would get out of the panic regulation mode and quit bullying the oil companies oil would go down some. We have it here big brother so back off and let them find it and produce it. Our current President has the poorest advisors on energy a responsible policy on any energy plan is never going to happen because they have zero knowledge on the subject and do not seek any from experienced people in the business!

Kaushik Chatterjee | May. 20, 2011
Based on the various incidents , it is really difficult to predict a commodity as volatile as crude oil. The demand will be there especially from BRIC countries as we are still depending on crude oil as major transport fuel. The oil producers especially OPEC will not let the price fall below 80-90 USD per barrel as it will hurt their revenues, it is like being addicted to that price range for them. Speculation and political instability in Middle East will continue to play a major role and try to influence the market in a big way, which can lead to a large intraday swings in the market prices of crude. From the consumers point of view , the way is to neutralize from the dependency of oil imports. It means more focus on renewables. Maybe if a revolutionary technology becomes commercially feasible for example battery driven cars, solar energy which can lure the customers dependency on crude such that the demand falls drastically, may be in that case chances are high that it may lead to dropping of crude prices. At last, but not the least, issues concerning the environment will be a major factor for people to look into alternatives even the prices are not high. So in short this crude market will keep the various players interested for some time.

G. Huseby | May. 20, 2011
It really doesn't matter what the little guy thinks, People in Canada and the USA, will have to pay for the high price gas , which 90percent is Taxation. All Politicians are the same , they stand up and say they are for the people, in a Hogs ass they are!, There isn't one that really gives a care about any little person or persons,they only care about who powders whose pocket , when it comes down to brass tacks. Its been a circle since they started Drilling. I know, I have been doing it 35 years.

geolog | May. 19, 2011
How Big Oil robs Us and destroys Western civilization : one way is ignoring innovative geophysical technologies.

Gary Jenkins | May. 19, 2011
The oil trading, along with ALL commodities, should, by law, go like this. From producer to manufacturer, to wholesaler, to vender, then customer. NOT bought,sold, traded, hedged, stored until shortage occurs, and all the other commodities trading tricks. The item, whether it be oil or corn, should be required by law, to only be bought and sold ONLY once per entity. A buyer I know laughingly told me, A gallon of gasoline may be bought and sold a dozen times before it gets into your fuel tank.

Arthur Spragg | May. 18, 2011
Well reasoned and logical article about a critical commodity.

Philippe Depart | May. 18, 2011
Very good article that point out the oil aspect of the world demand. It appears to me that we are entering a new era in our consumption of fuel. OPEC is leading the state control oil pricing. OPEC is setting a pricing that protect the needs of the OPEC population and interest. On the other hand, the privately control majors have limited potential profit. Majors producing from a OPEC country have large investments to amortize but are imposed an oil pricing. In the majority of investments, the majors by having to do business as JVs, splits the revenues as well. Majors privately managed, are opting to invest in natural gas. This NG is found in more stable political atmosphere with stable taxes and stable currencies. Short terms this change from oil to natural gas will be slow, the lack of large users is the cause. Long terms NGL will challenge the oil in the transportation industry. There are several environmental pluses to go NGL especially from a pollution angle. Once the cost deferential is well understood, the economics will tilt toward NGL. The majors such as the 5 sisters will be free from imposed pricing.

Jim | May. 18, 2011
Prices will definitely go back up on oil if Bernake does a QE3 this summer after the QE2 ends last of June? Dollar will plummet once again and commodities will increase in price again oil, gold, silver, etc... and of course prices for food, gasoline, etc... will go up some more. What a bad cycle the USA is in right now Yikes! :-(

John Spears | May. 18, 2011
Prices will come crashing down just as soon as everyone believes they will go up forever.

Leon Robinson | May. 17, 2011
Very thought provoking article. Quoted an interesting assortment of experts to provide an in-depth review of the current status of oil prices. Gasoline at $5.00 per gallon by Christmas should not be a surprise.

Jeanne Perdue | May. 17, 2011
Nice article.


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Brent Crude Oil : $51.78/BBL 0.77%
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