ANALYSIS: Where Are Oil Prices Headed?

Robust worldwide demand, along with the lack of Libyan output, will keep crude oil prices trending above $100 per barrel for some time to come, according to a review of current statistics from Rigzone and interviews with leading analysts.

"From a long-term perspective, we're just in a different world than we were in the 1990s, when there was $10 to $20 oil," commented Ruchir Kadakia, director of global oil fundamentals for IHS' Cambridge Energy Research Associates (CERA.)

"Between 2003 and 2008, demand really skyrocketed. In 2004, there was demand growth of 3 million barrels per day. That was pretty phenomenal."

A major driving factor in vigorous demand growth was and is China, with its continuing demand for more cars, Kadakia noted.

From 2005–2008, oil producers responded by ratcheting up supply.  However, during that time, production cost indicators more than doubled for 28 key CERA marker projects over the world, Kadakia observed.

Then, credit and housing markets collapsed, taking oil prices down with them, plunging from a high of $147 per barrel in mid-2008 to the $30's by early 2009. Yet, the cost index to produce oil dropped only 12 percent, according to IHS/CERA.

"There was just no place for all that production to go," Kadakia said. "Demand is so elastic. Supply is a three- to five-year response."

Some traders responded to the worldwide recession and plummeting oil prices by taking crude off the market and storing it in tankers, hoping for better times ahead, Kadakia explained. This is known as arbitrage.

Today's Fundamentals

Better economic times are here again, and with them oil prices and demand remain strong – if day-to-day volatility does occur.

According to May 10 statistics from the U.S. Energy Information Administration [EIA], total world oil consumption will grow by 1.4 million bpd (barrels per day) in 2011. Although this is about 0.1 million bpd below last month's EIA Monthly Energy Outlook, the agency predicts demand growth of 1.6 million bpd in 2012, slightly higher than forecast in April.

Meanwhile, supply from non-OPEC countries should increase by an average of 0.6 million bpd annually through 2012, EIA said. The preponderance of supply will come from Brazil, Canada, China and countries of the former Soviet Union, EIA forecasts. 

"EIA still expects that the market will rely on both inventory drawdowns and increasing production of both crude oil and non-crude liquids in OPEC countries to meet projected demand forecasts," the agency said. However, unrest among OPEC producers and unbridled growth in China are among the factors that add uncertainty to the forecast, EIA said.

EIA expects oil prices to remain strong, with West Texas Intermediate spot prices averaging $103 per barrel in 2011 and $107 in 2012. These prices, however, are down about $4 and $6 per barrel, respectively, from the prices in April's Short-Term Energy Outlook.

"World demand for oil continues to boom," said John Felmy, chief economist for the American Petroleum Institute [API.] "At 87.9 million barrels, it's at an all-time high and the International Energy Agency [IEA] expects demand of 89.4 million barrels [per day] this year."

"Is It the Real Price?"

Said API's Felmy: "On a day-to-day basis, futures traders are reacting to all the data. Ultimately, in oil markets, when the futures market closes, they have to make and take their contracts or roll."

"Is it the real price?" he asked. "I tend to say that it is."

 

John Felmy, chief economist, American Petroleum Institute [API]

"In China, they buy more cars than we do. There's high demand in China, but in America, we had the shut-down in the Gulf of Mexico [after the Deepwater Horizon disaster]. Libya is another couple of percent. It's a tight, tight market. It's a 32 billion barrel market for oil. It's a huge, huge market."

Underconfident Market

This might be a "huge, huge" market, but it's neither very confident nor stable yet at futures prices of more than $100 per barrel. On any given day, the price might "plunge," as the Houston Chronicle recently headlined, to under this level.

On Wednesday, for instance, the New York crude oil futures market took a dip to $92.40, upon news of separate EIA stats showing large increases in both crude oil and gasoline inventories, a sign that consumer demand is slackening in protest of high oil prices. Gasoline futures in New York also softened to only $3.12 a gallon on the news, reported the Los Angeles Times.

"Consumers will likely need to observe a steady descent in the cost of fuel before sentiment will see an increase," said Joseph Brussuelas, senior economist from Bloomberg LP in New York, in a story on the Bloomberg wire.

High energy bills serve as a "reminder for beleaguered consumers day to day of what has been a difficult economic recovery," Brussuelas continued.