In contrast with the previous two years, oil prices have held steady in the first eight months of this year. Except for minor spikes in May and earlier this month, they have seldom strayed outside a narrow US$70 to $80 per barrel price band.
Few analysts predicted this. At the beginning of the year, most were having trouble digesting the previous year's rebound. "Oil prices surprised on the upside, staging a strong recovery," economists at the Samba Financial Group, based in Riyadh, wrote in January. "The rebound in oil prices during the year has helped cushion the impact of the global recession on the GCC. "Developments during 2009 have served as a reminder that, while the GCC states are in the midst of an impressive economic transformation which is fuelling strong non-oil growth, their economies remain heavily dependent on oil and gas sectors."
Between February and October last year, crude came out of a trough below $34 per barrel rising to hover near $75, the level King Abdullah of Saudi Arabia had called "fair" for both producers and consumers. Crude's buoyancy defied shrinking global oil demand. By this January, the International Energy Agency, which advises industrialised countries, estimated industry oil stockpiles totalling more than 2.7 million barrels in developed countries were equivalent to 59.1 days of forward demand.
"This is well above the 52 days OPEC has traditionally sought to maintain and would normally exert a strong downward pull on prices," Samba noted. The company's petroleum economists estimated another 60 million barrels of crude was stored at sea in supertankers. An additional 80 million to 100 million barrels of oil products were in floating storage. "It seems clear that there will still be a substantial supply overhang in early 2010," they predicted.
Samba and others said crude's resilience was due to financial-sector "investors" entering the market and treating oil as an asset class comparable to equities and currencies. Ali al Naimi, the Saudi oil minister, said a "fundamental change" in the market had occurred with economic growth and the relative strength of the US dollar driving oil prices. Inventory levels were not expected to be the major influence on crude prices that they had been in the past.
OPEC had blamed "speculators" for propelling crude to a record $147 per barrel in July 2008. As equities declined and bond yields dwindled, huge volumes of capital flowed into the oil market in search of better returns. The result was the price surge of 2008, which some dubbed the "third oil shock" and interpreted as a sign that global supply would soon peak. Instead, demand had peaked, at least for a time. Global oil demand had started shrinking early in 2008, presaging the sharp economic contraction to follow. By the time the price bubble burst, the global economy and oil demand were in free-fall. The aftermath was the longest sustained slide in crude prices ever recorded.
Crude bottomed out in late December 2008at almost 80 per cent below its peak. It recovered slightly the following month as a three-week interruption of most Russian gas supplies to Europe rattled energy markets. A month later, once the gas dispute was settled, it relapsed. With the advanced economies of North America, Europe and Asia for the first time simultaneously gripped by recession, peak oil fears dissipated. They were replaced by speculation that demand for the fossil fuel might peak ahead of oil producers' capacity to pump it.
OPEC officials recalled the admonition of Sheikh Ahmed Yamani, the former Saudi oil minister, that "the stone age came to an end, not for a lack of stones - and the oil age will end, but not for a lack of oil". In March last year, at the group's biennial seminar in Vienna, Mr al Naimi, the most recent successor to Sheikh Yamani, appealed to industrialised nations not to give up on oil as their primary source of energy.
"After oil prices dropped by more than $100 a barrel and despite a global recession the likes [of which] has not been seen since the Great Depression, the momentum behind alternatives to oil continues unabated, which clouds the future prospects of oil demand," he said. "Compounding this clouded outlook are calls to lessen or end dependence on oil." Oil-importing nations "courted disaster" if their energy security and sustainability policies did not fulfil "high expectations", Mr al Naimi argued.
"In years to come, if traditional energy supplies should prove inadequate because capital expenditure was curtailed due to unsustainable prices, unreliable indications of future demand, or hopes for a substitute for oil cannot deliver, such a supply crunch would be catastrophic," he said "The painful result would be felt sooner rather than later. It would effectively take the wheels off an already derailed economy."
As last year progressed, the wheels did fall off the economies of most developed countries and enormous government stimulus packages proved powerless to put them back. The economies of North America, most European countries and Japan are still painfully bumping along, plagued by high unemployment, heavy debt loads and ageing populations, as governments plan austerity measures. None of this is conducive to a consumer-led economic recovery.
But in China and India, GDP growth merely slowed. Moreover, Beijing's stimulus plan successfully encouraged consumer spending, enabling Chinese manufacturers to replace exports with domestic sales. By the end of last year, Mr al Naimi was in a happier frame of mind. Crude's $70 to $80 price band was "perfect", he said. The threat to oil producers from renewable energy also seemed further off. Driving the point home, leaders who gathered last December at an environmental summit in Copenhagen failed to reach a strong agreement on reducing greenhouse gas emissions.
Meanwhile, GCC governments continued to invest in infrastructure and heavy industry, turning the region into a significant consumer of its own oil. The region's three big oil exporters, Saudi Arabia, the UAE and Kuwait, despite their revenue needs for capital-intensive projects, continued to adhere to the record cuts to OPEC quotas the group had agreed to a year earlier. Firmer crude prices, however, encouraged other OPEC members to bend the rules.
At the same time, Russia surprised economists with a surge in oil output. Last year, Russia surpassed Saudi Arabia in both oil production and exports, although the Arab state retains the world's biggest capacity to pump crude. But Iraq has now emerged as a future contender for the heavyweight production-capacity title after signing oil development deals in January with the world's biggest international oil companies and various state-controlled entities, most notably from China.
This month, the OPEC secretariat predicted demand for the group's crude this year would be 200,000 barrels per day lower than last year. "The modest recovery in demand coupled with higher than expected oil supply has led to a further build in stocks in recent months," it observed. "This highlights the need for increased efforts to strengthen market fundamentals." @Email:firstname.lastname@example.org