(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.

U.S. distillate supplies, long view. Based on data up to September 2009, when distillate inventories were at 171 million barrels, the highest level in 26 years. According to EIA data, the decline in distillate inventories over the next few months, including the reported “surprise drop” in the last few weeks, have had negligible effect on the historic situation, shifting the 26 year record by less than one year. (image: tonto.eia.doe.gov)

The U.S. oil glut, close-up. DOE Fuel Oil Total Inventory, past five years. (image: doe.gov)

Demand Rebound

The majority of analysts covered on this site, including Goldman Sachs, the IEA, and the EIA, declared it likely that oil demand will improve in 2010. Despite the economic slowdown felt most acutely by mature economies, these analysts find the surprising growth of developing nations, particularly China, in the same period as reason to expect a broader market recovery this year.

The most optimistic within this pack is the world’s largest energy trader, Goldman Sachs, who has predicted global demand to accelerate to 86.4 million barrels a day (mb/d) from 2009’s 84.9 mb/d due to growing consumption in China, India, and Brazil. Citing dwindling production levels in the world’s largest oilfields, Goldman Sachs projects that supply will fail to meet needed levels of demand in 2010, which will bring about a price hike to $90/barrel this year and $110 in 2011.

That demand will outpace supply is a perspective found in the results of a November Reuters poll of “ten prominent oil-tracking organizations,” and in Saudi Arabia’s oil minister Ali al-Naimi, who said in September that a demand rebound would quickly make the massive stockpiles of the commodity irrelevant. Despite vacillating positions on this issue in every report since October, the International Energy Administration has also most recently come out in favor of a short-term demand spike, predicting that 2010 demand will rise to 86.3 mb/d, and crude prices upwards of $100.

Table of 2010 oil demand predictions.

A Long Bottom

Other agencies, though agreeing that global oil usage is poised to rise, place this event farther off in the future. Relatively weaker demand estimates from OPEC, JP Morgan and the EIA reflect greater weight attributed to the economic recession and floating oil stockpiles.

OPEC said demand would rise only later in the year, and in the first part of 2010 would drop further. In its December report, it predicted a daily global consumption of 85.13 million barrels in 2010, a mere 0.82 mb/d increase over 2009 levels. As explanation, OPEC noted the extremity of the global oil glut. JP Morgan also cited the record supply glut in its demand forecast, which predicted a 1.1 mb/d increase.

In early December, the U.S.-based EIA lowered its national 2010 demand predictions at the same time that OPEC and the IEA were upping predictions for worldwide demand. While those other organizations were responding to new data from China and other non-OECD countries, the EIA was responding to a weaker-than-expected US economy, though the source of this newer wariness was not shared its Report Summary. Even without this minor adjustment, the EIA prediction would still be on the low end of the spectrum, at 85.22 mb/d, a 1.1 mb/d increase. The agency attributed “almost all” of expected 2010 oil demand growth to developing countries, underscoring the major shift in oil demand from wealthier to poorer nations.

In contrast to a Reuters poll mentioned earlier, a BDO Seidman survey of 100 American small and medium oil and natural gas companies predicted that 2010 oil demand will not rise at all. 

Demand Downturn as Market Correction

Only a handful of voices covered on HeatingOil.com believed oil demand could fall in 2010. These were motivated not by a belief that another economic downturn is imminent, but by skepticism for the “realness” of current oil market figures. A December Economic Times article and European oil trader Trafigura have posited that a price bubble is in the works, similar to the one that grew in the housing market a few years ago and caused the mortgage crisis of 2007 and subsequent credit crunch when it finally burst. Both pointed to the world’s massive oversupply of oil as reason for concern over the market’s high prices.

What’s curious is that establishment agencies such as the IEA have also repeatedly voiced strong concerns about the high price of oil, but have done so while neglecting to mention the supply overhang. In November, Goldman Sachs confessed in a report that it had “underestimated” the impact of the distillate oil glut, but made no adjustments to its 2010 demand predictions.

Price hedging activities by the Mexican finance ministry and oil traders as observed by analyst Phillip Verleger support the idea that the possibility of a coming bubble burst is more widely accepted than the highest-ranking analysts would have one believe. However, other competing theories such as peak oil complicate the picture and make it difficult to reject optimistic demand predictions.

In Short

The near-unanimous consensus is that oil consumption will rise this year as long as world economic conditions improve. Key in this “if” is the economic growth of non-OECD countries (developing countries), which has taken place at nearly the same rate in the last few years as the economic slowdown of OECD countries (developed countries). Optimistic analysts believe that non-OECD demand growth will continue even as demand from developed countries remains flat. Very optimistic analysts believe that non-OECD demand will rise sharply, and/or that OECD demand will improve moderately.

Global daily oil demand by year, broken into contributions by OECD and non-OECD countries. Based on the IEA Oil Market Report data of each year’s quarterly average, available here: http://omrpublic.iea.org/balances.asp.

However, the degree to which any nominal demand growth actually registers as real growth will depend on the speed at which countries absorb the distillate supply overhang, and to a lesser extent the crude overhang. If this does not happen quickly, then it forms another factor encouraging flat demand.

Widely anticipated as a year of transition by optimists, it will take time to see how each factor affects the others.

Note: This summary excluded discussion of oil prices, which are heavily affected by factors outside of real demand such as inflation, the strength of the U.S. dollar, and speculation in the oil futures market.

Looks like 2010 will be a down year for small and medium-sized oil and gas companies in the US. (image: mediabistro.com)

It’s going to be a long year for many oil companies, according to accounting firm BDO Seidman. As the Wall Street Journal reported today, the firm recently surveyed the chief financial officers of 100 small-to-mid-size US oil and natural gas companies concerning their expectations for 2010; by and large, the forecast is not cheery.

According to the survey, most companies don’t expect demand for oil to rebound until at least 2011. This means that next year many oil companies will be doing less business than they’d like to. Moreover, those CFOs surveyed don’t expect access to credit to improve until at least the second half of 2010, while they predict that industry spending will not reach 2007 levels until well into 2011 or beyond. If the survey is accurate, and demand for oil stays flat while prices remain low, some oil providers may have to sell assets just to stay in business. In fact, ConocoPhillips, Devon Energy, El Paso, and other companies have already announced big divestiture plans, and Mayer Brown, a corporate law firm, predicts more will follow.

Strangely, many CFOs seemed more upbeat last year, despite the fact that 2008 is generally considered to be the “year of the meltdown.” “Certainly in comparison to last year, the tone seems to be that we’re in for a rough ride,” said BDO Seidman partner Charles Dewhurst. According to Dewhurst, in 2008 oil executives were worried about a shortage of capital, but had not yet grasped the severity of the global financial crisis. A year later, it seems that reality has set in.

At least for domestic oil companies. The BDO Seidman survey represents the worries of small and mid-size oil providers, which don’t have the reach—not to mention assets—of multinational giants like Exxon Mobile and BP. Smaller companies are more sensitive to both commodity prices and the credit markets than are larger, better-capitalized providers. This makes them more susceptible to short-term demand trends, and more likely to suffer when capital dries up. In most cases, the big companies are better able to weather the storm.

Perhaps this explains the rather upbeat forecasts released last month by OPEC, the International Energy Agency, and the Energy Information Administration, all of which predict higher oil and fuel prices for 2010. 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. Back in October, the IEA pointed to similar reasons for ratcheting up its forecast for global demand next year, while the EIA released its monthly forecast in November predicting higher demand than was previously expected. According to the EIA report, benchmark US crude oil will cost an average of $78.13 a barrel in 2010, up from a previous estimate of $72.42 a barrel. Moreover, the new estimate marks a 26% increase over the expected average price for 2009, which was $62 per barrel. The EIA predicts that by December 2010, oil prices could hit $81 a barrel, “assuming US and world economic conditions continue to improve.”

While this remains to be seen, one thing seems certain: while big oil companies are looking to 2010 with heightened expectations, smaller companies see nothing but a long, gloomy year ahead of them.

Obama at the G-20 Summit. (image: dailyadvance.com)

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When President Barack Obama spoke in front of the United Nations global warming summit and promised to “work with my colleagues at the G-20 to phase out fossil fuel subsidies so that we can better address our climate challenge,” his proposal was alternately applauded and condemned. “It’s a great idea,” said Frank O’Donnell, the president of Clean Air Watch. “Wrong-headed,” said Jack Gerard, president of the American Petroleum Institute.

Observers of the politics of climate change are not surprised by such starkly opposed points of view. The confluence of the UN Summit on Climate Change (September 22), the G-20 Pittsburgh Summit (September 24–25), and the United Nations Climate Change Conference in Copenhagen (December 7–18) has made late 2009 a pivotal moment for the international community to shape environmental and energy policy, and both environmental groups and the fossil fuel industry have been preparing for it.

Global actors like the Organization for Economic Cooperation and Development (OECD), the United Nations Environment Program (UNEP), and the International Energy Agency (IEA) have all chosen to weigh in on climate change at this moment. It all builds to the Copenhagen conference in December, which now appears to be the precursor to an informal agreement on emissions reductions goals rather than a legally binding treaty.

While no mainstream voices bother to deny the powerful effect that greenhouse gas emissions have on climate change, the policy debates over the best means of reducing greenhouse gas are vigorous. Cap and trade has garnered the most attention out of the policy tools aimed at combating emissions, especially in the United States since the Waxman-Markey bill passed the House in June and the Senate debates its own cap and trade proposal. But the biggest incentive for emitters may not be the absence of a limit—it may be that the government subsidizes those emissions.

Ken Salazar, Secretary of the Interior. (image: treehugger.com)

Interior Secretary Ken Salazar unleashed a vehement attack on critics within the oil and gas industry, the New York Times reported on Tuesday. Salazar said that the Department’s “oil and gas leasing program is robust…[b]ut you wouldn’t know it if you listened to the untruths coming out of” the oil and gas industry. He went on to slam the industry for acting as if it, not the taxpayers, owns public lands; for not developing areas already under lease and instead trying to lease additional acreage; and for taking out leases ripe for challenge, protest, and litigation, which wastes taxpayer and shareholder money. He also stated that 38 onshore oil and gas leases are scheduled for 2010, and that 32 lease sales were held this year, to demonstrate that his Department is not stonewalling on leases.

Salazar was reacting to public criticism from the Independent Petroleum Association of Mountain States (IPAMS), which last week released a report critical of Department actions. As Kristin Miller reported, the IPAMS report criticizes the Department’s decision to cancel or hold for further review 60 of 77 Utah oil and gas leases granted by the Bush Administration. The report claims that there was “no evidence” of environmental or procedural issues that would support withdrawing the leases, as well as a “’lack of regard’ for the seven-year public planning process” that preceded the leases.

IPAMS offered extensive detail to support their contention that withdrawing the leases was not justified. For example, one of the leases was for a parcel buffered from a national park by existing, previously granted leases, and which had been subject to planning and review to prevent impacts on air quality, paleontology, and engendered species.

Salazar has taken considerable heat for actions that slow the tempo of development; apparently, after the IPAMS report, he’d had enough and decided it was time to hit back.

A natural gas drilling site near Syracuse, NY. (image: blog.syracuse.com)

As the Legislative Gazette reported on Monday, the New York State Senate is considering the expanding of drilling allowances in upstate New York for natural gas. Instead of a public hearing, the Senate Environmental Conservation Committee is currently conducting a roundtable discussion with both environmentalists and drilling proponents to sort through the issue. As HeatingOil.com’s Steven Zweig reported last week, the proposal is fraught with environmental and safety concerns, so it’s crucial to hear all sides of this particular argument.

The natural gas is located along the Marcellus Shale bed in New York’s Southern Tier, but there is concern over the possible contamination of nearby drinking water and other environmental impacts. Companies interested in exploiting the vast resources were at the roundtable, ready with arguments about the safety of the chemicals used, and the economic benefits of the proposed drilling. Environmentalists, however, are not convinced.

“The benefits have been greatly exaggerated,” said Al Appleton, the former New York City commissioner of environmental protection.

Appleton and other environmentalists are deeply concerned about the chemicals used in hydrofracking, a process used to break up the rock and release the gas, as well as the possible contamination of drinking water, and the anticipated impact on the state’s forests. The natural gas companies are arguing that water can be treated and made potable again, a claim Appleton does not believe.

The next step for the Environmental Committee is to determine which drilling issues would be better addressed by the state Department of Environmental Conservation’s regulatory review process, and which through legislation. Senator Antoine Thompson, Chairman of the Environmental Conservation Committee, would like to see an extension to the public comment period, allowing 90 days instead of 60 for well-researched comments and arguments.

With so many potential health and environmental risks, here’s hoping the Senate will take all appropriate action to research the matter fully before making any decisions. Even though the area could use the economic boost, and natural gas is a bit cleaner than oil, if the anticipated effects are accurate, it might be best to leave the gas in the ground.