NEW YORK (Commodity Online): Sovereign debt fears, US financial crisis and consequent recessionary trends have caused crude oil prices to crash in the past few weeks.WTI crude for September has fallen 9.2% on week to $86.88 while Brent Crude has fallen 6.2% to $109.37. This has created concerns about a repeat of 2008 when Oil prices crash from $147 levels to below $70 in a short span of time.
Barclays Capital in an analysis points out five factors that could make a repeat of 2008 impossible in the present scenario.
1) Libyan supplies are unexpected to return to world market in 2011: Considering the civil war and political tensions which means that 1.5 mn barrels per day would be out of supply from the market for a longer time.
As of today, the cumulative loss of Libyan output since the start of the civil war amounts to 233 mb, nearly four times the amount released by the IEA and almost a third of the total size of the US Strategic Petroleum Reserve. The absence of Libya has allowed Saudi Arabia to move its output above 9.5 mb/d and to eye 10 mb/d, without to date having to run any risk of oversupplying the market.
2) OPEC may not sell below breakeven: In 2008 when prices crashed to below $70 there was a strong compulsion on the part of OPEC to allow price to go below breakeven levels to kick start demand in consuming economies as they slid into recession. The present underlying issue for recessionary trends is caused by sovereign debt while Saudi Arabia and much of OPEC member nations. Barclays Capital said that it is very unlikely that Saudi Arabia will feel the need to sacrifice revenues to sell below breakeven levels.
3) No major demand crash expected: Barclays Capital points out there was a massive fall in US oil demand in 2008 September at 2.56 mn b/d on year-on-year basis and OECD oil demand fell 3.9 mn b/d in November 2008. In 2011 there are no projections or expectations of any falls in demand of that severity or anywhere close. Yes, US oil demand has weakened , but the damage has been contained to falls of 0.5 mb/d, not 2.5 mb/d. Considering demand for the main oil products,
4) Call on OPEC still rising: Even after a fairly sharp paring in estimates of oil demand growth, we are still forecasting a call on OPEC crude and inventories of 30.3 mb/d in Q3 and 30.5 mb/d in Q4). OPEC crude output in Q2 amounted to just 29.5 mb/d. In other words, we could cut our H2 demand estimates by a further 1 mb/d before OPEC even needed to cut anything if it wished to avoid an overall inventory build. To justify the scale of cut that OPEC made in 2008/9, H2 demand would have to be lower than the current forecast by 4 mb/d. The macroeconomic concern at the moment is of frustratingly low growth and more austerity, but not yet the sort of economic implosion that could produce a 4 mb/d fall in oil demand across all of H2. The call on OPEC in H2 that is larger than OPEC output in Q2. While another round of monthly reports due in the next week is likely to cut that gap, we doubt that it will remove it completely, particularly in the case of the IEA projections. We expect that the IEA will still think that OPEC should be adding oil the market, precisely at the time when OPEC thinks it should be taking oil away. That combination seems unlikely to be associated with any price collapse that could be sustained. In short, current fundamentals appear to be a far cry from those that drove the 2008/9 cycle, Barclays Capital said in the analysis.
5)The cycle repeats itself: During downswings below breakeven levels renewable economics and also oil sand economics began to break, and the whoe supply-side reaction led much of the market to conclude that $100 per barrel for the back of the curve was now the new normal, and below that would represent low prices. The oil industry’s ability to cope with lower prices without damaging future supply is limited On the demand side, lower prices fed into a sharp global demand upswing, leading to the fastest demand growth for 30 years, with demand growth in 2010 running at least twice as fast, and perhaps three times as fast, as the maximum the supply side could cope with into the medium term, Barclays Capital noted.
Spare capacity of 6.5 mb/d quickly became spare capacity of just 2.5 mb/d. The lesson of the last cycle is that the further prices are forced below $90 and the longer they stay there, the faster the market tightens in the upswing. During that last downswing we wrote that we did not believe prices could be sustained into the medium term below $90. In the final analysis we believe that proved to be correct, prices could move below $90 but they could not be sustained below that level. Since then, cost inflation has returned and, as noted above, producer aspirations have moved upwards by some $20. We thus feel even more confident this time to reiterate that 2008 view that prices are not sustainable below $90 per barrel because of the associated damage to supply and the stoking up of demand that prices below that level represent. Indeed, in this particular aspect we suspect that $100 for Brent is probably the new $90 in terms of what is a sustainable price, Barclays Capital report said.
