Bank of America Trims Forecasts for Oil Prices, Oil Demand
Falling oil prices forced Bank of America Merrill Lynch to lower its forecast for oil prices in 2010. (image: thebrandunion.com)
Falling oil prices in recent weeks offer not only temporary relief from high oil prices, but could help keep fuel costs down for the rest of the year. In the aftermath of Europe’s debt crisis, which has brought the price of crude oil down below $68 a barrel from a high point above $87 in early May, Bank of America Merrill Lynch now predicts that oil demand and oil prices will be lower than previously expected in 2010.
Bank of America, like many other forecasters, expected strong economic growth to generate increased oil demand, which would push oil prices higher throughout the year. However, the debt crisis in Greece and Spain, which will curb growth and oil demand in the European economy economy, has led oil prices sharply down in May and prompted the bank to change its mind. Now, as Reuters reports, Bank of America forecasts the price of crude oil to average $78 a barrel in the second half of 2010, down from the $92 a barrel it had previously anticipated.
Weaker than expected oil demand will hold prices under $80 a barrel, says Bank of America, which reduced their forecast for growth in oil demand by 25 percent. Instead of growing by 2 million barrels per day (bpd) in 2010, Bank of America now expects demand to grow by 1.5 million bpd.
For heating oil users, the prospect of crude oil at $78 a barrel for next heating season sounds much more appealing than crude oil at $92 a barrel. However, that’s still an increase from the current crude oil price, and even if Bank of America is right the price of oil at the end of the year could be higher than the average price of $78 a barrel. The timing of economic recovery (and the higher oil prices it would bring) might not do heating oil consumers any favors, as they could see the market price for crude oil and heating oil rising just as they begin using heating oil in earnest.
Yet the fact of Bank of America’s substantial revision could indicate that oil traders are reassessing the future of the oil market in 2010. Oil prices climbed earlier in the year as traders predicted economic growth that always seemed to be just around the corner. If oil prices remain moderate until the global economy shows actual improvement, that could be good news for heating oil users as winter approaches, and Bank of America may be pushed to make further revisions to its price forecast.
IEA Cuts Forecast for 2010 Global Oil Demand
The IEA reduced its forecast for 2010 oil demand due to tepid demand in many countries in Asia and the Middle East. (image: internationalenergyworkshop.org)
One day after OPEC and the Energy Information Agency (EIA) raised their forecasts for oil demand in 2010, the International Energy Agency (IEA) bucked the trend and cut its prediction for oil demand this year. The IEA’s revision lowered their demand forecast by 220,000 barrels per day (bpd) compared to their April forecast, reported the Wall Street Journal.
Sluggish demand in emerging markets in Asia and the Middle East, which many analysts expect to drive growth in oil demand for years to come, led the IEA to revise its forecast. The agency singled out Iran and Malaysia as showing lower demand than previously expected, though the IEA does not expect any slowdown in China’s oil demand. Uncertainty in the global economy added to the IEA’s cautious revision. Europe is working to bail Greece out of its debt crisis and prevent instability from spreading to the similarly debt-ridden nations of Spain and Portugal, but if Europe’s economy struggles that could disrupt fuel demand not only on the continent and reduce global oil demand.
While demand concerns guided the IEA’s forecast, the agency also noted that oil supply remained plentiful. The IEA raised its estimate of non-OPEC crude oil production in 2010 by 200,000 bpd to 52.3 million bpd.
Even after cutting its demand forecast, the IEA remains more optimistic about oil demand than OPEC. OPEC, after hiking their forecast for oil demand on Tuesday, expects demand to be 950,000 bpd higher than demand in 2009. The IEA, though it trimmed its prediction, thinks demand will exceed 2009 levels by 1.6 million bpd.
Because the IEA still expects significant year-on-year growth in oil demand, though slightly less growth than foreseen in April, the agency’s revision has had a muted impact on oil prices. Fuel demand is still expected to recover this year as the economy recovers and that has kept oil prices on an upward trajectory, even as that demand has been more than adequately covered by existing supplies.
IEA: Record-High Oil Demand in 2010
The IEA says that economic recovery will lead the world to use more oil in 2010 than ever before. (image: juneauempire.com)
The International Energy Agency (IEA) announced on Tuesday that it had revised its estimates for oil consumption in 2010, and now expects this year to have the highest global demand for oil ever, reported Reuters. The new estimate is 100,000 barrels per day (bpd) higher than before, with oil demand expected to average 86.6 million bpd.
“The return of economic growth and hence oil demand growth is fuelling the increase,” the IEA said in the April edition of its monthly Oil Market Report. In February the IEA forecast that oil demand in 2010 would match the previous record of 86.5 million bpd, set in 2007 before the recession. As recovery continues, the IEA predicts that oil demand from 2009 to 2010 will grow by 1.67 million bpd.
Oil demand is rising not just in the developing nations of Asia and the Middle East, the IEA said, but also in North America. Demand in Europe remains weak. Non-OPEC supplies will meet this demand, especially growing production in Canada, the UK, and Russia. The IEA raised its forecast for non-OPEC production by 220,000 bpd to reach an average of 52 million bpd.
Growing supply from outside of OPEC, combined with eroding compliance with production quotas within OPEC, could keep prices stable as demand increases. In fact, the price of crude oil continued to decline on Tuesday after the IEA’s announcement. Nevertheless, the IEA echoed the concerns of other analysts and warned that rising oil prices could prevent economic growth, which in the end would harm producers as well as consumers:
Ultimately, things might turn messy for producers if $80-$100 per barrel is merely seen as the new $60-$80, stunting economic recovery while prompting resurgent non-oil and non-OPEC supply investment.
According to the IEA, the interests of consumers and producers are aligned in favor of lower oil prices.
High Oil Prices Could Stunt Economic Recovery
This modified graph of oil prices shows that price spikes precede nearly every recession, represented by shaded areas. (image: econbrowser.com)
Crude oil’s latest rally pushed it to highs not seen since October 2008 as it briefly topped $87 a barrel in midday trading on Tuesday and Wednesday. Prices of refined petroleum products—whether heating oil, gasoline, or diesel—have followed crude oil’s upward swing and pinched consumers’ wallets in the process. The justification for rising oil prices is that economic recovery is underway and will lead to increased demand for fuel, but could rising oil prices have such an adverse effect on consumer spending that they stall economic recovery?
The Financial Times examined the question on Thursday and found a number of analysts concerned that high energy prices will curb economic growth, or even trigger another recession, just as the global economy is showing signs of life. Olivier Jakob of the oil consultancy Petromatrix said another oil rally could be “the kiss of death” for economic recovery. Jakob and others quoted by the Financial Times are merely the latest to voice concern that recovery would be hindered by high oil prices, joining such figures as the chief economist of the International Energy Agency, Fatih Birol.
Rising oil prices threaten economic recovery by forcing consumers to spend a larger percent of their money on oil products, limiting the amount they can spend on other goods—the type of consumer spending that generates economic growth. Economist James Hamilton, one of the experts who spoke with the Financial Times, explains the relationship in more detail at his blog, Econbrowser:
Americans buy a little less than 12 billion gallons of gasoline in a typical month. With gas prices now about a dollar per gallon higher than they were a year ago, that leaves consumers with $12 billion less to spend each month on other things than they had in January of 2009.
Hamilton thinks the latest recession was partially caused by the 2007–2008 spike in oil prices, and notes that “Ten of the 11 recessions in the United States since World War II have been preceded by a sharp increase in the price of crude petroleum.” But while $12 billion is a lot of money, Hamilton thinks the real threat to recovery comes from all the other ways that consumer spending shifts when people are faced with high oil prices. This can vary from a drop in car sales to consumer anxiety that leads people to postpone purchases of any durable goods.
Not every analyst tracked down by the Financial Times thought rising oil prices would prevent recovery. “The only way to keep oil prices down is to remain in a recession, which hardly sounds attractive,” economist Luts Kilian told the paper. Yet no one thought rising oil prices were helping the economy or helping consumers. Hamilton takes a middle road between Kilian and “kiss-of-death” Jakob, but concludes that “$87 oil is certainly not helping the recovery.”
This Week in Heating Oil: Two Visions of 2010 Oil Prices
This week brought fresh predictions for 2010 oil prices from two prominent sources: the investment bank Goldman Sachs and the Centre for Global Energy Studies in the UK.
Goldman, still confident that a robust economic recovery will take place in the global economy this year, increased its crude oil price prediction to $85-$95 a barrel by the end of 2010. Its prediction is based in part on expectations that the Chinese economy will lead the world out of the downturn and provide a massive boost to oil demand over the next few months.
The Centre for Global Energy Studies agrees that the global economy will see some recovery this year, but that it would be modest and lead to only slight increases in oil demand, and therefore predicted that the price of crude would remain below the $80-$90 range. On the subject of China’s role in a recovering economy and resurgence in oil demand, the Centre made the point that a Chinese recovery would first require economic recovery in OECD nations that are the biggest importers of Chinese consumer goods. Because the strength and speed of recovery in wealthy nations is in doubt, the Centre reasons, gradual recovery of the world economy and limited, incremental increases in oil prices is a more likely scenario.
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Economist Jeff Rubin Talks $225 Oil by 2012 and the End of the Global Economy
Jeff Rubin and the cover of his recent book, Why Your World is About to Get a Whole Lot Smaller. (image: treehugger.com)
Jeff Rubin is not an oil alarmist—he doesn’t think that the world’s supply of crude will run out and cause resource wars and food shortages of apocalyptic proportions. In fact, he doesn’t even think the world’s supply of crude is running out at all. Rubin made this clear as he addressed the Business of Climate Change Conference in Toronto last September, opening his keynote address with the statement, “The world’s not running out of oil.” However, after milking the pause for a second or two, Rubin went on: “But it has already run out of oil it can afford to burn.”
Rubin, former head economist at CIBC World Markets, is often referred to as Canada’s top economist, largely because of his bold and accurate economic predictions: in 2000, he forecast that the price of crude would hit $50 per barrel within five years (it broke the $50 mark in 2004) and foresaw the huge price spike of 2008. He recently predicted that the price of crude would hit $100 again by the fourth quarter of this year.
His view of the future of oil and its role in civilization is just as startling as many prevailing theories within the peak oil community, but interestingly different from most that have come before.
As he explained at the Business of Climate Change Conference, Rubin envisions a world that has run out of cheap oil “not in the next 10 to 12 years, but in the next 10 to 12 months.” In his model, the beginning of the oil crisis is not marked by a sudden and extreme depletion of oil reserves, but oil prices that rise at an accelerating rate, driven by rapidly growing demand from the global economy (primarily from developing countries like China and India) and expanding development of expensive and energy-intensive non-conventional sources. According to Rubin, “since 2005 conventional oil supply has not grown, and may never grow again.” As the supply from conventional oil fields drops off, it will have to be replaced by supplies from dirtier, harder-to-process unconventional sources like the tar sands of Alberta, Canada. Because the processing of unconventional sources is so expensive, Rubin argues, the crude oil it produces will be more expensive. Combine higher baseline production costs with growing global demand and you get a huge increase in crude oil prices over a short period of time. Read More »
Dollar’s Rise Could Lower Heating Oil Prices
The euro’s weakness could reduce costs for heating oil consumers. (image: en.vangtrieuphong.com)
In what could spell some relief for the US, Europe’s troubled economy—with its troubled euro—is giving the dollar a much-needed boost. According to the Wall Street Journal, the US dollar is rallying after November reports suggested that the US economy is on the mend. Though the momentum slowed in recent weeks, it seems that the dollar is riding high once again.
The faltering euro can be traced back to Greece, where a flagging economy has traders worried. The euro fell 0.5 percent against the dollar Thursday, with the short-term outlook for European economic recovery not looking very strong.
While the news is unfortunate for our friends abroad, this does bring some good news to American heating oil and energy consumers. Since heating oil and other commodity prices move inversely with the dollar—they fall as the dollar strengthens—this news could bring with it lower heating oil prices, and higher spirits.
Study: China’s Oil Demand Weaker than it Seems
An employee of Sinopec, China’s national oil company, at work. (image: daylife.com)
The world may expect China to drive a resurgence in oil demand and a subsequent rise in prices, but according to a new report from IIFL, its oil consumption growth is actually decelerating, said an article published on Monday in India’s Business Standard. IIFL wrote in its report on China’s quest for energy security that, “The importance of China’s oil consumption and growth to global trade, albeit undoubtedly significant, had been grossly overrated.”
The IIFL also mentioned that China imports much less oil than the “developed world.” The IIFL described China as a “price-taker, not yet a price-driver.”
Heating Oil Price Preview: January 11, 2010
In the Northeast, last week was all about the weather. Extremely cold temperatures drove up demand for heating oil from Maine to Washington, D.C. and brought about some pretty major price increases (average retail heating oil prices jumped eight cents per gallon on Tuesday January 5th).
This week, continuing cold temperatures are expected to keep demand high, though the worst of this first-of-2010 cold snap appears to be over.
As a result of last week’s spike in heating oil demand, millions of barrels of heating oil in storage on ocean tankers began the journey to ports on the East Coast. As that influx of supplies hits the Northeastern market this week, it should have a calming effect on heating oil prices. Look for prices to rise slightly this week, but significantly less than last week.
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Economist Rubin, Who Predicted 2008 Spike, Sees $100 Oil in 2010
Rubin predicted the last spike in oil prices—will he be right about the next one? (image: ipsnews.net)
According to BusinessWeek, Jeff Rubin, the economist who correctly predicted 2008’s massive crude oil price spike, believes that petroleum prices are steadily headed toward the $100 mark. Asserting that oil prices will hover around $90 by the end of March, the former CIBC World Markets Inc. chief economist believes that “it’s safe to say that we’ll see triple-digit oil prices by the fourth quarter of this year.”
Rubin attributes rising oil prices to increased consumption by countries with rapidly developing economies such as India and China. This occurrence will in turn force the United States to rely on more expensive non-conventional sources of oil. Increased consumption, Rubin believes, will outweigh other factors that could cause price spikes, such as political disturbances in oil producing nations and production limits set by OPEC. Rubin’s prediction challenges recent forecasts made by Peter Cooper, who believes that oil prices will drop in 2010 and that factors such as rising Chinese demand are not credible because the strength of emerging market economies is questionable.
Lamentably, if Rubin again proves correct, consumers should expect to pay more for heating oil as he predicts crude prices could reach up to $160 a barrel in 2012, a level at which he asserts “the global economy becomes very challenged.”
Commodities and Dollar Now Rising Together
The dollar's rise now comes with a rise in commodities as well, pointing to growing demand for both. (image: thebull.com)
The Wall Street Journal reported Thursday on an unusual pattern occurring on Wall Street between commodities and the dollar. While the prices of commodities and the value of the dollar normally move in opposite directions, (with commodity prices rising as the dollar falls) both have been on the rise since the end of November. Since commodities are priced in dollars, a declining dollar means it takes more of them to purchase raw materials, and vice versa. A strong dollar usually pushes down the price of commodities, which happened as recently as mid-December. However, the larger trend of the last month has been commodities and the dollar rising together.
Behind the current anomaly, the Journal reports, are signs of an economic rebound and the widespread belief that a recovery would lead to an increased demand for commodities, thus bolstering the dollar. Furthermore, some investors expect the situation to continue for some time.
2010 Oil Demand Predictions
(image: chrisjordan.com)
Right now the price of crude is $83 on NYMEX. Global daily demand for oil, assuming no change from the 2009 average, is 84.9 million barrels a day (mb/d) according to the IEA’s December Oil Market Report.
The global economy is in flux and it’s anyone’s guess which factors will exert the most influence over demand for crude oil in 2010. The question for many has been whether growth in China and other non-OECD countries like India and Brazil will be enough to offset declining demand from North America and the United Kingdom. An added factor that has received little attention is the historic levels of global crude and distillate supplies currently in storage—a massive overhang of 159 million barrels—the likes of which have not been seen for 26 years. Read More »
A Skeptical Take on the EIA’s 2010 Energy Outlook
Chris Nelder penned a scathing critique of the EIA’s Annual Energy Outlook 2010. (image: angelnexus.com)
On December 14, the United States Energy Information Administration’s (EIA) released its Annual Energy Outlook 2010. The purpose of the report is to present projections of US energy consumption and production up to 2035. Although the Outlook reports many findings, one of the most important states that a trifecta of energy efficiency, alternative fuels, and higher energy prices will result in a flattening out and stabilization of crude oil demand and a rise in renewable fuel use over the next twenty-five years.
Shortly after the Annual Energy Outlook 2010’s release, critics responded and challenged many of the EIA’s findings, methods, and logic. On December 18 an analysis by energy expert Chris Nelder was posted on Ourfuture.org. With a heavy dose of sarcasm, Nelder cheekily deconstructed the EIA report and asserted that it is grossly oversimplified due to the plethora of factors the EIA did not use in making its conclusions. For instance, Nelder takes the report to task for failing to address last year’s fluctuations in the price of crude oil, which hit extremes of $33 and $147 a barrel, and for not considering peak oil, peak gas, and peak coal theories that project peaks in production of those energy sources within the next twenty-five years. Neither does the report take into consideration America’s forty-year trend of declining oil production or the inevitability of declining productivity in mature oil fields.
Chief Economist Quits CFTC; Could Limits on Oil Speculation be Coming Soon?
Harris at hearing. (image: nytimes.com)
Last week, as if enacting a weighty New Year’s resolution, Jeffrey Harris, chief economist at the Commodity Futures Trading Commission (CFTC), announced that he will leave the agency and return to academia, The Wall Street Journal reported on Wednesday. In 2008, Harris raised the ire of some lawmakers by suggesting that rampant speculation was not responsible for spiking commodities prices, a view which put him at odds with CFTC Chairman Gary Gensler. Harris’s resignation comes just before the commission’s announcement of a new proposal to limit commodities trading, which provokes intriguing conjecture on why exactly Harris has decided to retire, and whether or not the decision was wholly his own.
While Chairman Gensler has called for the imposition of trading limits on crude oil and other energy futures, believing that more regulation will lower commodities prices, Harris has shown little inclination toward such a policy. In April of 2008, he told the Senate Energy and Natural Resources Committee that accusations against Wall Street speculators had been overblown. “Looking at the trends in the marketplace, combined with studies on…the impact of speculators in the markets, there is little evidence that changes in speculative positions are systematically driving up crude oil prices,” Harris said.
Another Forecast for Falling Crude Oil Prices in 2010
A strong dollar could keep oil prices down in 2010. (image: weakonomics.com)
Forces such as emerging market demand, speculation, and a weak dollar—all of which have supported higher oil prices in 2009, despite a recession—may not sustain oil prices in 2010, according to an article published on Seeking Alpha on Monday. First of all, signs exist of a global tightening of monetary policy, said author Peter Cooper. In addition, the true strength of emerging market economies, such as China, is being called increasingly into question.
Third, the US dollar is recovering after an extended decline against the euro. Cooper cited weak global demand caused by the recession as a fourth reason that oil prices might be lower in 2010, as demand could lag even as the global economy lurches toward recovery.
Analysts Lay Out Two Scenarios for 2010 Crude Prices
Bloomberg asks 2009’s best oil forecasters what they see in their crystal ball for 2010. (image: telegraph.co.uk)
Bloomberg asked the oil analysts who had been most successful in predicting the price of crude oil in 2009 where oil prices would be headed next year, and two divergent scenarios come to the fore: the first sees crude staying high and looming in the $88-$92 range for the fourth quarter of 2010, while the second has it dropping much lower, to $59 a barrel by the end of 2010.
The first scenario, the Bloomberg post notes, is supported by the two analysts who were the most accurate forecasters of crude prices in 2009; their predictions were “within 9 percent of market levels.” Mike Wittner of Societe Generale SA and Hannes Loacker at Raiffeisen Zentralbank Oesterreich AG think that oil will stay up in 2010, buoyed by increased demand and stagnant production.
Heating Oil Price Trend for December 22: -1¢
(image: welt.de and life.com)
Despite rising in early morning trading on Monday, oil prices declined yesterday, with heating oil prices losing a penny. This weekend’s winter storm led investors to push oil prices higher, as cold weather in the Northeast is expected to boost heating oil demand and cut into the large inventories of distillates, which include heating oil and diesel. However, after the early surge a stronger dollar held down oil prices and the prices of other commodities; a strong dollar makes commodities priced in dollars, like crude and heating oil, more expensive for investors who hold foreign currency.
Today’s average retail heating oil price in the Northeast is 1 cent lower than Monday’s average price.
Heating Oil Price Preview: December 21, 2009
Last week’s inventory reports showed a large decline in stockpiles of distillates, which includes heating oil and diesel, and caused a spike in the price of heating oil. However, with refineries operating below 80 percent of their capacity, it’s not clear that the drawdown of distillates was due to increased demand.
The dollar’s recent resurgence has pressured the price of oil and other commodities, and the dollar will likely stay strong as the US economy improves. While that will weigh on the price of heating oil, cold weather could trump the dollar and push heating oil prices higher this week.
This Week in Heating Oil: December 18
The second week of the UN climate conference in Copenhagen has wound down, and there’s not a lot to get excited about. Disorganization, conflict, and mistrust marred the conference from beginning to end. President Obama’s speech to the conference today failed to bring about any last-minute breakthroughs, and although some sort of eleventh-hour deal could come out of Copenhagen tonight or even tomorrow, it doesn’t appear very likely. For more details on what happened there over the last two weeks, take a look at Kristy Kershaw’s daily reports on the happenings in Denmark.
President Obama’s “Cash for Caulkers” program will not be implemented any time soon, if at all–last Friday, the House of Representatives passed a jobs-creation legislation that did not include Cash for Caulkers or any similar program. Hopefully, the program will get the support it needs some day, but it looks like that day is at least months away.
Some progress was made this week–also last Friday, the US House passed the Wall Street Reform and Consumer Protection Act of 2009, which included limitations on how commodities contracts, including crude oil and heating oil, could be traded. The intended effect of the provisions is a reduction of oil price volatility to make budgeting easier on businesses and individuals who rely on heating oil and other energy products.
Dollar’s Rise Brings Down Price of Oil and Other Commodities
This week, commodities prices dropped across the board. (image: etftrends.com)
The inverse relationship between the value of the dollar and the price of commodities reasserted itself as the dollar rose sharply this week and commodities prices dropped, in almost every category. The fall in prices reflects the fear that key drivers behind the surge in prices for commodities (like gold, crude oil, and heating oil) could be weakening, reports the Wall Street Journal.
In recent months, commodities have been more affordable with a weak dollar, especially for investors using foreign currencies, which made them more attractive. In addition, investors flush with cash thanks to historically low interest rates have been seeking profit on commodities markets.
