Analysis: What's Happening in the Oil Market, Anyway?



The summer of 2011 could not have a much more dramatic close as a major hurricane hurled up toward the U.S. East Coast on the heels of a rare earthquake, the U.S. summer driving season closes with the Labor Day holiday, and Libyan rebels appear to be taking over Tripoli.

How will major refineries and pipelines along the East Coast be affected by the hurricane? How will holiday driving plans proceed, amid what OPEC is terming the gathering "dark clouds of recession?" How long will take to see the effects of the Libyan situation play out on the oil market? And when it does, will the roughly 1.2 million barrels per day (mbpd) of oil that Gaddafi's Libya typically produced be welcomed back, by rebounding economies thirsty anew for more? Or, will it be almost like a "white elephant," in American vernacular, that is, almost excess in a recessionary market?

The answers: Nobody really knows, of course.

But what is evident, looking back over the summer, is that nobody who usually "calls" the market has done so with much confidence for months. On a day-to-day basis, prices have recently just eased up or down, depending upon the news of that day. While that in itself isn't unusual, the activity of late has been relatively static, with price moves fluctuating within a few dollars per day, and sometimes dancing around a dime or so of the previous day's price.

The U.S. Energy Information Administration (EIA), for instance, noted that West Texas Intermediate (WTI) had risen only by $2.92 per barrel from a week earlier on Friday Aug. 26 – with a major hurricane approaching – and was up $12.78 from a year earlier. This increase over last year came despite large drops during the summer driving season, which mostly came in small day-to-day increments. WTI crude oil spot prices fell from an average of $110 per barrel in April to $97 per barrel in July, EIA noted. During the first week of August, world crude oil prices fell by about $10 per barrel, reflecting market concerns about world economic and oil demand growth, the agency said.

Market Remains Tight

Despite the woebegone worries about the world slipping into recession again, with corresponding demand cutbacks, the thing to bear in mind is that demand is still growing. It's just that OPEC, the International Energy Agency (IEA), EIA and other leading analysts are cutting back the pace of demand growth to reflect lagging economic performance, along with debt woes in both Europe and the U.S.

"We are still expected to remain near record levels of demand," said John Feldman, chief economist of the American Petroleum Institute, in an interview with Rigzone. "It's still a limited supply market. Libya resuming production should be helpful." He observed that Libya's internal strife took a "relatively small proportion" (about 1.2 mbpd) off the market, but had "disproportionate" effects. This was one reason why the IEA eventually called for member nations, including the U.S., to contribute to the market from emergency stockpiles.

For once, OPEC could not just turn up the oil taps after the organization had a rift in June. Specifically, Saudi Arabia, Kuwait and the United Arab Emirates voted to increase output as early summer demand kept roaring – and Libya's contribution, disproportionately felt, perhaps – stayed off the market. The other OPEC members, meanwhile, voted against hiking production. Because even the Middle East couldn't bring on sought-after light oil production right away, IEA member nations contributed some 60 million barrels to the supply equation.

"It made sense," Feldman continued, "That [Middle East and other] producers would have sold their light, sweet crude varieties first."

Looking ahead, EIA said that it "still expects oil markets to tighten as growing liquid fuels demand in emerging economies continues to outpace supply growth with continuing upward pressure on oil prices." EIA forecasts that WTI spot prices, which averaged $79 per barrel in 2010, will average $96 per barrel in 2011 and $101 per barrel in 2012.
 



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