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Where next for the crude market roller coaster?


April 15, 2009 - If the events of 2008 can teach the soothsayers of the oil industry anything, it must surely be that theirs is a near-impossible task, as oil prices rose further than anyone would have thought possible, then promptly fell even further and even faster.


The last twelve months have rewritten many of the assumptions about the interaction between world oil prices, supply and demand, causing changes which we are only beginning to appreciate. (See related chart: Changing outlook for 2009 world oil demand (million b/d).)


Add to the mix the difficulty in estimating how deep a global recession might be and how long it might last for, and the assumptions underpinning any short-term forecasts suddenly look rather shaky.


To understand where the industry goes from here, we have to take stock of exactly what has happened over the last 12 months and what its impact will be.


Over this period, we have seen oil prices on the world's main futures exchanges reach the giddy heights of more than $147/barrel, despite the apparent paradox of weak sentiment in the underlying physical crude markets.


OPEC seemed powerless to prevent the run-up in prices, which left many market-watchers scratching their heads as they looked in vain for fundamental reasons.


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The ensuing freefall in outright prices was accompanied by even more chaos, with some long-standing price relationships inverted and one of the notable periods of contango in oil markets of recent years taking hold.


Refined product crack spreads were also volatile, with refiners suffering from weak margins and reports of voluntary run cuts emerging by the beginning of 2009.


And even though the downward ride on the roller coaster happened at even more breakneck speed than the preceding ascent, it is worth remembering that oil prices averaged around $100/b for the whole of last year -- a hefty bill to pay for consumer countries already struggling with the deepening recession.


No single player or stakeholder in the oil market can claim to exercise much control over prices, but all are hostage to its vagaries.


Most obviously, consumers have been buffeted, initially by the high oil prices themselves and then by the general economic downturn.


Demand is set to fall this year, and will probably remain sluggish at best in 2010.


Just as importantly, the collapse in prices seen in the latter months of 2008 and the rapid deterioration in the financial climate are causing oil companies to rethink investment plans, with signs of reduced budgets and delayed projects sparking fears of a possible shortage of supply.


Towards the end of the first quarter, crude prices remained relatively calm, albeit at a level which most in the industry insist is too low to encourage the investment in future capacity which will be needed once the world economy picks itself up again.


OPEC has reasserted some semblance of control over prices after slashing production by a record amount since late 2008. (See related chart: OPEC crude output since March 2004 (million b/d).)


Prices remain lower than its members would like, but are perhaps better than they feared they might be three months ago.


Now all they need is for the biggest global recession of the last 50 years to come to a swift end.


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