Which direction will oil flow?

KUALA LUMPUR: Global oil demand is predicted to grow in 2009 after shrinking this year, the first annual contraction since 1983. This could very well push oil prices up from current levels, but the question remains whether the growing demand would see a sustained rally in oil prices.

The general consensus though appears to be that the peak of last July is unlikely to be revisited next year, given the anticipated global slowdown in the months ahead and despite the anticipated recovery in the second half of next year.

In a monthly report by the Paris-based International Energy Agency (IEA), global oil demand for 2009 is forecast to grow to an average of 86.3 million barrels a day (mb/d) versus the estimate for this year at 85.8 mb/d. Demand was at an average of 86 mb/d in 2007.

While the oil demand growth forecast for 2009 could boost the price of the commodity, Singapore-based economist for Standard Chartered Bank, Alvin Liew, opined there would still be downside risks.

“While we expect oil prices to ease from the highs seen in mid-2008… the global synchronised slowdown in 2008 and 2009 could be deeper and more protracted than our present expectation,” Liew told The Edge Financial Daily.

He expected oil prices next year to average at US$59 (RM214.17) per barrel and a more sustainable rebound averaging at US$80 a barrel in 2010.

Crude oil bounced from a four-year low of US$40.50 a barrel on Dec 7 to trade at US$46.58 a barrel on the New York Mercantile Exchange as at 4.23pm last Friday. It had fallen more than 68% from the peak of US$147 a barrel in July.

RAM Holdings Bhd chief economist Yeah Kim Leng said oil demand growth would depend on the timing of recovery in global economies.

“At this juncture, there are much uncertainties given that global economies are looking at deepening woes. Should the monetary and fiscal stimulus packages announced by various governments be implemented quick enough, this would see global economies stabilising in the second half next year, prompting oil price to rise,” he said.

On the supply side, Standard Chartered’s commodity analysts opined that supply constraints would re-emerge when demand for oil recovered.

The Organisation of the Petroleum Exporting Countries (Opec), the cartel which controls 40% of world’s oil production, had cut its output to 31.3 mb/d in November from 32.1 mb/d produced in October, according to IEA estimates.

“Opec has indicated that it is highly likely to cut output again at its Dec 17 meeting. The organisation’s success in restraining output will be critical to stabilising prices at these levels.

“Given the structural supply constraints, the crude oil market will likely recover strongly once demand is rekindled,” Standard Chartered said in its Commodity Outlook for 2009 report on Dec 4.

Previous efforts to boost prices via production cuts were rendered ineffective as some Opec members did not keep to their part of quota cut when prices rose and of course, non-Opec oil producing nations could continue pumping more to take advantage of higher prices.

Once demand rebounds, Standard Chartered said pressures on the supply side would be more evident, which could push prices up. Opec oil ministers were quoted as saying they were looking for oil prices to rebound to US$70–US$80 a barrel level to ensure adequate investments.

For oil companies such as Petroliam Nasional Bhd, the onus is on them to ensure continuous investments in the exploration and production (E&P) segment to keep production constant even when oil prices are still low.

“At the moment, Petronas would have to contend with lower revenue and profitability. During the low oil price period, Petronas should continue its E&P and position itself to increase its supply and reserves,” Yeah said.

While there was less profit for Petronas, the government would gain from retail fuel sales, given that pump prices were now higher than the market price of petrol, he said.

“With the extra revenue generated, the government ought to set aside the amount for a stabilisation fund that can be used when oil price resumes its upward trend.

“Even if world oil prices were to remain at current levels in the short term, the government should make efficient allocation of the revenues and channel the accumulated funds to improve public transportation system,” Yeah said.

Meanwhile, analysts remained upbeat on the country’s oil and gas (O&G) sector.

KFH Research Ltd associate director Tursina Yaacob said: “The services and supporting activities should continue and this would benefit the supporting companies to the sector, such as those in maintenance and vessels support.”

The Edge Daily- Liim Shie-Lyn