Oil Set for Rebound as Record Drop Spurs OPEC Production Cuts

By Grant Smith and Mark Shenk

Dec. 30 (Bloomberg) -- Oil futures may rebound from their worst year to average $60 a barrel next year as OPEC makes record production cuts to counter the deepest economic slump since World War II.
The forecast, the median of 33 analysts compiled by Bloomberg, represents a 50 percent gain from yesterday’s $40.02. A 14 percent reduction in supply, equal to 4.2 million barrels a day, pledged by the Organization of Petroleum Exporting Countries will erode U.S. crude inventories that rose 10 percent this year as the slowing economy reduced world demand for the first time since 1983.
While oil tumbled from a record $147.27 in July consumers in the U.S., Japan and Germany faced their first simultaneous recessions in six decades. The plunge risks curtailing investment in new rigs, refineries and alternative energy sources, setting the stage for a supply crunch later on.
“Once we get through the crisis, we will find that support is higher than $40 a barrel,” said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts. “The decline in demand has already occurred. A lot of analysts were late coming to realize that. By next summer this market should be turning around.”
Crude futures averaged $100 this year, the highest since crude began trading on the New York Mercantile Exchange in 1983. Oil plunged along with commodities from copper to corn in the second half as world economies slowed in the credit crunch caused by $1 trillion of losses and writedowns at the world’s biggest financial companies.
Corn is down 46 percent since June 30 on the Chicago Board of Trade, and copper 67 percent on the London Metal Exchange.
Russia, Saudi Arabia
TNK-BP, the Russian oil venture of London-based BP Plc, said Dec. 11 it plans to cut investment next year and keep production “broadly flat.” Saudi Arabia’s 2009 budget has a deficit of 65 billion riyals ($17 billion) as revenue at the world’s largest oil exporter tumbles.
“A price extremely low today will mean prices very high three or four years from now,” Paolo Scaroni, the chief executive of Eni SpA, Italy’s biggest oil company, said in London on Dec. 19.
Royal Dutch Shell Plc, Europe’s largest oil company, has postponed an agreement on extending its Athabasca oil-sands project in Canada and also delayed a plan to develop a $3.5 billion coal-to-liquids project in Australia.
Analysts expect oil prices to rise through the year to $70 a barrel in the fourth quarter as demand improves and OPEC production curbs announced this month take hold. The U.S. economy may return to growth in the second half of 2009, reviving consumption in the world’s largest energy user.
OPEC Cut Pledge
OPEC pledged Dec. 17 to reduce production from 11 of its members to 24.845 million barrels a day. The group may meet again before a scheduled March conference if prices keep falling, Venezuelan Energy Minister Rafael Ramirez said Dec. 23. Prices rallied yesterday after Israeli air strikes in the Gaza Strip raised concerns that Middle Eastern oil supply may be disrupted.
Nymex futures prices for 2009, also known as the forward curve, indicate a shallower recovery than analysts are predicting. The so-called 2009 strip, or average of the 12 monthly contracts, is trading at about $45 a barrel.
Goldman Sachs Group Inc. and Deutsche Bank AG, which predict $45 and $47.50 for the 2009 average, also say prices may slide to $30 or less before rebounding.
“The main determinant of oil prices next year will be how deep is, and the duration of, the economic downturn,” said Guy Caruso, who was administrator of the U.S. government’s Energy Information Administration from 2002 until September.
‘Stop the Bleeding’
“OPEC is trying very hard to stop the bleeding but it is chasing after something it can’t control, another year of falling demand,” Caruso said, now a senior energy and security adviser at the Center for Strategic and International Studies in Washington.
OPEC and the U.S. Energy Department estimate oil demand will fall in 2009, after slipping this year. The International Energy Agency expects an increase, forecasting a 0.5 percent gain to 86.3 million barrels a day.
“All of the things that sent prices soaring have turned around,” Adam Sieminski, Deutsche Bank’s chief energy economist in Washington said in a Dec. 22 interview. “You had very strong global GDP growth, a lack of spare capacity, a lack of spare refining capacity, geopolitical crises such as in Iraq, Nigeria and Iran.”
Sieminski, along with Merrill Lynch & Co. and commodity trader Vitol Group, also says consumption will fall next year.
Consensus Views
Analysts surveyed by Bloomberg failed to anticipate 2008’s moves. A year ago, the median forecast for 2008 was $79 a barrel, missing the actual year-to-date average by more than 20 percent. The consensus view for 2009 dropped by almost 50 percent since oil touched a record on July 11, when the median forecast was $117.50 a barrel.
Supply threats and disruptions in Iran and Nigeria led oil prices higher during the first half of 2008 along with a 7 percent decline in the U.S. dollar’s value against the euro that led investors to seek a hedge in commodities. Since the July peak, the number of outstanding Nymex crude contracts declined 16 percent to 1.14 million with the exodus of hedge funds and other speculative investors.
Oil stocks worldwide suffered from crude’s collapse. Exxon Mobil Corp., Shell and BP declined by between about 16 percent and 18 percent this year, all still beating benchmark indexes, with the Standard & Poor’s 500 Index down 41 percent and the U.K.’s FT-SE 100 losing 33 percent.
OPEC, which controls more than 40 percent of global supply, stands to earn $444 billion from oil exports in 2009, down from $962 billion this year, according to a U.S. government estimate.
“OPEC are desperately trying to claw back control of the market but all they can really do is wait for prices to settle before they’re able to restore a supply equilibrium,” said Ronald Smith, head of research at Moscow-based Alfa Bank. “If they can get prices up to the $50s, which would have been terrible a few months ago, they should be happy.”
To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Mark Shenk in New York at mshenk1@bloomberg.net.