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Oil Prices Remain Weak

Falling demand pushing prices down again

By Mark Huffman
ConsumerAffairs.com

June 29, 2009

“The global financial crisis has turned the economic landscape upside down, with huge implications for the oil and gas sector,” said Nobuo Tanaka, Executive Director of the International Energy Agency.

Since the release of last years’ editions, the context has changed dramatically. Two years of global oil demand contraction in 2008-2009 reflect the worst economic recession in over fifty years.

“Oil prices are around half the level seen last year in July, when they peaked at $147, even though they have strengthened again recently, partly due to a perception that economic recovery may be just around the corner”, Tanaka said, warning that if oil prices rose too rapidly it could damage any such recovery.

“In the natural gas sector, we have moved from a tight supply and demand balance with extremely high gas prices to an easing one with plummeting prices. Both markets face enormous uncertainty surrounding the timing, pace and extent of any economic rebound, which affects all prognoses for oil and gas market fundamentals over the next five years.”

It's all good news for consumers, who have eyed this spring's climbing gasoline prices with unease. But prices appear to have peaked in the last week. The nationwide average price of self-serve regular is down today for the seventh straight day, hitting $2.639 a gallon, according to AAA.

The revised forecast comes as bad news for OPEC, which has trimmed its production in an effort to push oil prices higher. Oil producing countries are hoping to balance the loss of revenue from declining output with higher prices.

Oil demand is forecast to grow at between +0.4 percent and +1.4 percent annually after 2009, depending on the pace of global economic recovery and mid term GDP trend growth levels. The difference is hugely significant for global oil balances, with the higher growth scenario resulting in 2014 demand of 89 million barrels per day - fully 4 mb/d above the lower growth case.

For either scenario, however, demand contraction so far in 2008/2009, plus early signs of structural shifts, result in projections of the world using at least three mb/d less oil than when those projections were first generated last December. It remains to be see, the IEA says, whether that reduced consumption is part of a long term trend.

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