OPEC Joins Consensus, Predicts Rising Oil Demand and Higher Prices in 2010

Posted by Jared Killeen on November 23, 2009 at 9:07 am

Members of OPEC’s leadership confer in March of 2008. (image: foreclosurepro via flickr.com)

In its monthly report for November, OPEC predicted a slight rise in global oil demand for 2010, citing as a cause the world’s economic recovery and, in particular, growth in emerging Asian economies including China and India, according to an Oil & Gas Journal article published on Wednesday. OPEC’s report is in step with recent forecasts released by the International Energy Agency (IEA) and the Energy Information Administration (EIA), both of which predict increased demand and higher oil prices in 2010, due in large part to a revived economy.

According to OPEC’s forecast, global oil demand will reach 85.07 million barrels a day in 2010, an increase of 0.9 percent, or 0.8 million more barrels a day, over this year. Specifically, OPEC predicts that demand will increase 3.7 percent in China and 3.34 percent in the Middle East, while dropping 1.25 percent in Western Europe. These estimates fall just short of the IEA’s monthly outlook, which sees crude demand in 2010 reaching 86.1 million barrels a day, an increase of 1.7 percent, or 1.4 million more barrels a day, and driven by a 3.6 percent surge in demand from developing countries.

It is OPEC’s belief that the world economy will continue its recovery, growing by 2.9 percent in 2010 after a contraction of 1.1 percent in 2009. China—one of the world’s most voracious oil consumers—is expected to grow 8 percent and 8.5 percent in 2009 and 2010, respectively. If economic growth and recovery lead to increased demand for oil (as OPEC predicts), then the price of oil will likely go up. The EIA forecasts that US crude oil will cost an average of $78.13 a barrel in 2010, up from a previous estimate of $72.42. Accordingly, by December 2010 the price of oil could hit $81 a barrel, “assuming US and world economic conditions continue to improve.”

Still, OPEC seems hesitant to paint a rosy picture of the oil market; rather, its predictions are full of cautious language, like those of the IEA, which stated this month that despite the fact that “the pace of demand contraction is clearly easing, the outlook for 2010 is still fraught with uncertainty.” In its report, OPEC suggests that world oil demand is unlikely to return to pre-crisis levels in the near future, warning that a sustained increase in the price of oil could hurt crude demand, especially given the shaky economy. This admonition has been stated by economists like Nouriel Roubini, who worries that inflated oil prices could hinder economic recovery.

Of course, there is also the matter of fuel distillates. According to OPEC’s report, despite a drop of 19.4 million barrels in October, US commercial distillate stocks are still abnormally high. Thus, “[w]hile a cold winter may provide support for product markets and encourage refiners to increase runs in the coming months, excessive levels of distillate stocks could further constrain refinery operations, impacting crude stock movements.”

Furthermore, OPEC’s analysis—which is based on the principles of supply and demand—may be inaccurate if, as some analysts have argued, the price of oil is currently more strongly affected by forces of the financial market. According to Daniel Yergin, for instance, “Oil prices today do not reflect the world’s supply and demand fundamentals.” Rather, it is the weakness of the dollar and an overriding faith in economic recovery that is pushing the price of oil up to $80 barrel. This theory—recently espoused by both Roubini and Exxon CEO Rex Tillerson—calls into question predictions made by OPEC and other groups like the IEA and EIA.