Oil prices stay low amid economic slowdown Massive output cut by OPEC in 2008 and started showing some effect as constant flow of negative news on the economic front continued to dampen oil prices. US crude decreased by 9.8% during the review period (20 Jan 09-17 Feb 09) to settle at US$34.93 per barrel mark. US crude has lost 75.9% since it reached an all-time high of US$145.16 per barrel on 14 July, 2008. The oil prices hovered around the US$35.0-45.0 per barrel range during the review period as introduction of fiscal stimulus packages in the major economies failed to jack up oil prices significantly. Doubts have been expressed over the effectiveness of the stimulus packages as the major economies face their worst ever recession since the great depression. OPEC basket and Kuwait export crude price increased marginally following the OPEC output cut increasing by 1.4% and 2.2% during the review period to settle at US$39.89 and US$38.71 per barrel respectively.

World oil demand is expected to average 85.10mn bopd in 2009, a decline of 0.6mn bopd YoY. The decline in OECD oil demand is expected to outweigh demand from Non-OECD countries. World oil demand growth will come largely from China, Middle East and other Asia. These countries will make up for 78.0% of Non-OECD growth, according to OPEC. In 2008 high oil prices and removal of subsidies in the first seven months and economic crisis in the second half led to oil demand destruction. The gloomy economic outlook for 2009 with major world economies in recession is expected to lead to a further decline in oil demand. The US unemployment rate has reached 7.6% while major Asian economies are facing a major decline in export revenues.

World Oil supply averaged 84.55mn barrels per day in January, a decline of 0.39mn barrels per day from December levels (OPEC). The decline was largely due to the implementation of output cut by OPEC in late October 2008. OPEC crude share is estimated to have declined to 33.9% in January. The sharp decline in crude oil prices prompted OPEC to cut its output again by 2.2mn barrels per day in the meeting that took place in Oran, Algeria, on 17 December, 2008 taking the total of output cuts to 4.2mn barrels since September 2008. The last cut became effective from 1 January, 2009. Refining margins for WTI crude at US Gulf surged by US$8.18 per barrel over the previous month to reach US$8.83 per barrel. (OPEC). On the contrary, Brent crude oil margins at Rotterdam decreased to minus US$1.09 per barrel in January from US$2.79 per barrel in December. Dubai crude oil in Singapore increased to US$4.03 per barrel in January compared to US$2.73 per barrel in December. Total US commercial stocks stood at 1,042.9mn barrels at the end of January 2009 compared to 1,016.0mn barrels at the end of December 2008 (OPEC), with crude oil stocks increasing the most by 22.9mn barrels during January 2009 to 347.4mn barrels. Western Europe total oil stocks witnessed a decline of 2.2mn barrels during January 2009 to 1,113.0mn barrels from December 2008 levels, largely due to a 2.6mn barrels decrease Naphtha stocks to 28.2mn barrels during the same period.
Crude Oil Prices
US crude oil price decreased by US$2.58 (6.9%) on 17 February, 2009 as negative news on the economic front kept flowing in from all corners of the globe. Oil prices fluctuated wildly during the review period (20 Jan 09-17 Feb 09) as cold weather and bleak economic outlook pulled oil prices in opposite directions. Oil prices hovered in the range of US$35-45 per barrel. The bullish sentiments arising from cold weather and stimulus packages were dampened by a constant flow of negative news on the economic front. Japan posted a 3.3% QoQ decline in the fourth quarter, the worst since 1974, indicating a deeper recession. Further build-up in inventories and expected production cuts and employee retrenchments in major corporations will continue to keep oil demand depressed. Despite the aggressive fiscal measures being taken there is a fear that it won’t be enough to stem an impending global economic slowdown thus casting a shadow on oil demand projections.
US crude oil price has lost 75.9% in six months since it reached an all time high of US$145.16 per barrel on 14 July, 2008. Like the spot market the futures market was also volatile in the backdrop of worsening economic indicators. The Nymex WTI averaged US$41.92 per barrel in January 2009, marginally down from the previous month. Open interest volume volume averaged 3,051,200 lots around 35,000 higher than the previous month. (OPEC) The forward contango further steepened with the 1st/2nd month spread at US$4.47 per barrel. Contango is the amount by which the future price is higher than the spot price. Crude oil market contango occurs when there is perception of either of a future supply shortage or a present supply glut.
US crude oil prices recovered by 24.5% in the first week of the review period to US$45.47 per barrel as the likely passage of the US stimulus package boosted investor sentiments despite a further build-up in inventories. Oil prices receded in the second week by 8.3% to US$41.68 per barrel as a major UK Bank posted a huge loss indicating weak economic conditions. Stronger US$ against major currencies also led to this bearish trend. During the third week continued their decline to end up at US$40.17 per barrel, a decline of 3.6%. Weak economic fundamental continued to have an impact. However unusually cold weather conditions in the Europe and the US prevented a steeper fall in oil prices. US crude prices declined a by a further 6.6% in the fourth week of the review period as negative economic news kept flowing in. Rising inventory is also pointing towards a weak demand. The concerns over the economy were entrenched by lower expected lower corporate profitability and major workforce retrenchments in the major economies. US crude settled at US$36.51 at the end of the review period. OPEC basket and Kuwait export crude price increased marginally following the OPEC output cut increasing by 1.4% and 2.2% during the review period to settle at US$39.89 and US$38.71 per barrel respectively.
Crude oil price movements
An across-the-board recovery was witnessed in January in the crudes in the Middle East, bringing to a halt the sharp declines in the past four months. Murban increased the most by US$5.56 followed by BCF-17 with an increase of US$5.49. Kuwait export also witnessed an increase of US$3.53.
WTI/Brent differential decreased from US$1.10 per barrel in December 2008 to minus US$2.09 per barrel in January 2009. This effectively means that the US crude or WTI is trading below its counterpart. WTI has historically commanded a higher price as it is a low sulphur oil. However the recent economic turmoil and build up in the oil inventory in the US is putting pressure on WTI prices.
Brent/Dubai difference increased from US$-0.11 per barrel in December 2008 to US$-0.35 per barrel in January 2009 . In other words Dubai price exceeded Brent price in January. Typically the WTI has traded at a premium of US$1.00 per barrel over Brent and US$2.00 per barrel over OPEC basket price.
World Oil Demand
According to OPEC world oil demand is expected to average 85.10mn bopd in 2009, a decline of 0.6mn bopd YoY. The decline in OECD oil demand is expected to outweigh demand from Non- OECD countries. World oil demand growth will come largely from China, Middle East and other Asia. These countries will make up for 78.0% of Non-OECD growth. The decline in world oil demand will largely be due to an expected decline in OECD oil demand by 1.13mn barrels per day in 2009. In turn the major fall in OECD oil demand is attributed mainly to the US, the world’s largest economy and the biggest oil consumer. The US officially entered into recession in December 2007. Approximately 2.5mn jobs were lost in the US in 2008 with a staggering 0.53mn jobs in the month of December. Further job cuts are expected in 2009 indicating that recession will last for a longer time which will tame oil demand in 2009. The US unemployment rate has reached 7.6% while major Asian economies are facing a major decline in export revenues
According to OPEC the world oil demand in 2008 is expected to end at an average of 85.70mn barrels per day, a decline of 0.2mn barrels per day YoY. It is interesting to note that it will be the first time since 1983 that the oil demand growth has declined. Oil demand growth has increased at an average of around 1.9% since 1983.
High oil prices and removal of subsidies in the developing countries in the first seven months led to demand destruction. The credit crunch raised its ugly head in the latter part of the year as bankruptcies and bail-outs became a regular feature, precipitating a slowdown in world economy and hence oil demand which was reflected in the sharply falling oil prices.
Oil demand from OECD countries is expected to decline by 1.13mn bopd in 2009 YoY with demand in North America expected to decline by 0.57mn bopd while demand in Western Europe expected to decline by 0.30mn bopd.
As can be seen in the table below China’s demand is projected to grow by 0.18mn barrels per day in 2009 to 8.16mn barrels per day on the back of robust economic growth which is estimated to be in the range of 7.0-8.9% this year according to the United Nations Development Program. Demand in developing countries (DC) is expected to grow by 0.35mn barrels per day to average 25.38mn barrels per day in 2009. The growth in the DC category will be led by the Middle East with a projected increase of 0.24mn barrels per day.
World Oil Supply
According to OPEC, non-OPEC supply is expected to average 50.89mn barrels per day in 2009, an increase of 0.55mn barrels per day over 2008. There has been a downward revision of 0.03mn barrels per day to the previous month’s estimates.
Oil supply from USA is projected to increase by around 0.17mn barrels per day to 7.69mn barrels per day in 2009 compared to the estimated 2008 levels. US production from the Gulf of Mexico continues to recover in the aftermath of the hurricanes that disrupted the operations.
Production ramp-ups in other fields is the other reason behind the expected increase in US production. Canadian oil supply is projected to grow 0.09mn barrels per day to 3.34mn barrels per day in 2009 while Mexican oil supply is expected to decline by 0.18mn barrels per day to average 2.99mn barrels per day in 2009. Mexico’s oil supply is projected to decrease due to a reduction in production from its Cantarell field.
A decline in oil production is projected to arise in Western Europe of 0.26mn barrels per day in 2009 largely due to a decline in production in Norway by 0.12mn barrels and a decline in UK production by 0.14mn barrels per day.
As can be seen in the table below, the major contributors of non-OPEC supply growth are the developing countries. Oil supply from developing countries is projected to increase by 0.41mn barrels in 2009 to 12.64mn barrels per day from 2008 levels. Latin America is expected to be the main contributor of growth in the DC group category.
Former Soviet Union (FSU) region oil supply is projected to increase by 0.16mn barrels per day in 2009 while China’s supply is expected to increase by 0.06mn barrels per day in 2009.
OPEC Production
OPEC oil production averaged 28.71mn barrels per day in January 2009, a decline of 0.96mn barrels per day from December 2008 levels, according to OPEC February 2009 monthly report. OPEC production excluding Iraq was 26.33mn barrels per day.
The decline was due to a move towards implementation of the output cut of 2.2mn barrels per day decided by OPEC in the meeting which took place in December 2008.
The sharp decline in crude oil prices, which have fallen by 74.8%, since it reached an all-time high of 145.16 on 14 July, 2008, prompted OPEC to cut its output by a record 2.2mn barrels per day in the meeting that took place in Oran, Algeria on 17 December, 2008. The significant cut is aimed at stabilizing oil prices and clear the backlog of a huge oil inventory. This follows the concerns voiced by many quarters relating to possible cancellation of investment in the oil industry and delay of orders in view of a continued fall in oil prices.
The following table shows the output quota for OPEC member countries after the recent output cut. The next OPEC meeting is scheduled to take place on 15 March, 2009 in Vienna, Austria.
Refinery Margins and Utilization
Refining margins for WTI crude at US Gulf surged by US$8.18 per barrel over the previous month to reach a US$8.83 per barrel(OPEC). Arrival of unusually cold weather and lower crude oil prices lifted the refinery margins. However, the current rise might turn out to be short-lived as health of the world economy and hence oil demand will maintain pressure on the refinery margins. On the contrary, Brent crude oil margins at Rotterdam entered the negative territory to US$-1.09 per barrel in January from US$2.79 per barrel in December. Dubai crude oil in Singapore increased to US$4.03 per barrel in January compared to US$2.73 per barrel in December.
The gloomy world economic outlook is likely to maintain pressure on refinery margins going forward which is likely to discourage further investment in the downstream sector.
Though refinery utilization rates usually increase in December and January to cater for higher demand in the winter season, this time around low refining margins and gloomy demand outlook has led to a decline in utilization rates in the US. Refinery utilization levels in US decreased to 84.4% in January from 85.8% in December. Utilization rate in Germany remained declined by 4.1% to 85.2% in January while the utilization rate in France declined by 13.0% to 71.1% in January as lower demand stemming out of weak economies is compelling refineries to reduce their throughput. Utilization rates in Italy and Eur-16 also declined by 2.0% and 3.5% respectively in January.
Throughput in USA decreased by 0.25mn barrels per day in January to 14.72mn barrels per day. Throughput in France and Germany decreased by 0.22mn and 0.10mn barrels per day respectively. Throughput in Japan decreased by 0.15mn barrels to 3.89mn barrels.
Throughput is likely to decline further going forward as falling demand in view of lower world economic growth will put pressure on the refining margins.
Refinery Product Prices
The prices of all major products witnessed an increased in January in the US after a sharp decline in the past four months. Naphtha and Premium gasoline prices increased the most by US$12.27 and US$9.91 per barrel respectively followed by Fuel oil (1.0% S) which increased by US$8.59. Lower refinery runs and cold weather lifted the product prices up. However the ongoing recession and the consequent fall in demand from consumers is likely to maintain its pressure on endproduct prices.

In the Asian market all the major products witnessed an increase with the exception of Gasoil/Diesel which decreased by US$1.82 per barrel in January. Naphtha prices in Singapore increased the most by US$11.57 per barrel followed by a increase in Premium gasoline by US$11.17 per barrel. Regular Gasoline was the other major gainer with an increase of US$7.32 per barrel. Naphtha prices increased on the back of demand from petrochemical companies in China and South Korea. In the European market, Naphtha prices at Mediterranean increased the most by US$11.09 per barrel followed by Naphtha prices at Rotterdam which increased by US$10.47 per barrel.

World Oil Stocks
Total US commercial stocks stood at 1,042.9mn barrels at the end of January 2009 compared to 1,016.0mn barrels at the end of December 2008 (OPEC), with crude oil stocks increasing the most by 22.9mn barrels during January 2009 to 347.4mn barrels. This is the highest level of inventory since July 2007.  Lower utlilization rates of around 84.0% and increased imports due to lower crude and endproduct price has led to this rise in inventory by 26.9mn barrels in January 2009. Slack demand and contango in the future markets were the other factors increasing the total oil stocks.

The increase was mainly due to an increase in Crude oil stocks by 22.9mn barrels during January 2009 to 347.4mn barrels from the December 2008 levels and increase in Gasoline stocks by 12.1mn barrels to 220.2mn barrels in January 2009 from the December 2008 levels. Western Europe total oil stocks witnessed a decline of 2.2mn barrels during January 2009 to 1,113.0mn barrels from December 2008 levels, largely due to a 2.6mn barrels decrease Naphtha stocks to 28.2mn barrels and 2.6mn barrels decline in Fuel oils stocks due to a decline in refinery output. However crude oil stocks witnessed an increase of 4.2mn barrels as lower WTI prices stifled out any arbitrage opportunities.