Unseasonable mild winter weather coupled with heavy selling by financial funds have pushed down oil prices this year. The move has been aided by an important trend at a time of sustained global growth that hasn't been seen for decades. For the first time in years, the developed world is burning less oil.
Data issued by the Paris-based International Energy Agency (IEA), the energy watchdog of the industrialized countries including Ireland, show oil consumption in the 30 member countries of the Organization for Economic Cooperation and Development fell 0.6% in 2006. While the the fall appears small, it marks the first annual drop in more than 20 years among the OECD countries, which use close to 60% of the 84.4 million barrels of oil used globally each day. Industrialized nations' demand did fall into negative territory in 2002, but the dip was so slight that it registered as flat.
The warm weather in early 2007 arises partly from a moderate-strength El Niño already established in the Pacific, which is expected to persist through the first few months of 2007. (El Niño was originally recognized by fisherman off the coast of South America as the appearance of unusually warm water in the Pacific ocean, occurring near the beginning of the year. El Niño means The Little Boy or Christ child in Spanish. This name was used for the tendency of the phenomenon to arrive around Christmas.) A moderate to strong El Niño typically brings mild winters to the northern US. The lag between El Niño and the full global surface temperature response means that the warming effect of El Niño is extended and therefore has a greater influence the global temperatures during the year.
On Thursday, US light crude West Texas Intermediate benchmark oil for February delivery settled at $50.48 a barrel, down $1.76, or 3.4%, on the New York Mercantile Exchange (NYMEX). Earlier in the day, futures fell below $50 a barrel for the first time since May 2005, hitting a fresh 20-month low after the US Energy Department said US crude-oil stockpiles rose the most in more than four years. Oil had hit a peak of $78.40 on July 14, 2006. This year, prices have fallen 17%.
Light crude is trading electronically on NYMEX Friday at 07:40 am Irish time at $50.36 a barrel. Brent crude is trading in London at $51.64.
Crude oil's fall to $50 a barrel may push US gasoline pump prices below $2 a gallon for the first time in more than two years, based on historical price moves. The last time the average price for regular gasoline was below $2 was in March 2005, according to the AAA, the largest U.S. motorist organization. Prices are already below $2 in some parts of the country, including Oklahoma City and Kansas City, Missouri. The nationwide average was $2.209 on Jan. 17, down from a peak of more than $3 during the summer.
The Wall Street Journal says the tipping point where oil prices begin to erode demand was reached last summer, several industry analysts said.
The fall in oil use by the industrialized world is a sign that the reactions to higher oil prices by businesses and consumers from the US to Germany to Japan may be adding up to a cycle-turning downdraft in demand. The resulting shift in global cash flows could mean a big boost for oil consumers' economies at the expense of producers and exporters.
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Source: US Energy Department
Other signals, both economic and psychological, have been popping up for some time: Demand for gas-guzzling sport-utility vehicles has been falling, while investment in and sales of alternative fuels such as ethanol are booming. Even the Bush administration is vowing to reduce America's dependence on crude.
Overall global oil demand grew 0.9% in 2006, owing to growth in China and the Middle East, down from growth of 3.9% in 2004 and 1.5% in 2005.
The Journal says some analysts see game-changing forces in motion. One is the rise of nonoil transport fuels. "Last year was a tipping point in a lot of ways," says Philip Verleger Jr., an oil economist who heads PK Verleger LLC. "Biofuels will take bigger and bigger bites out of petroleum demand," Verleger said, noting climate-change and security concerns relating to the supply and use of petroleum. "Alternate fuels will take up all the growth, leaving petroleum demand static in the next two or three years."
Forecasts by the IEA suggest biofuels output could rise to the equivalent of more than five million barrels of crude oil a day by 2011, close to triple output of such fuels in 2005. Global oil demand last year rose by 780,000 barrels a day to 84.4 million barrels a day, the latest IEA data show.
HIGHLIGHTS OF IEA DECEMBER 2006 REPORT:
Crude oil prices fell to 20-month lows in mid-January as lower demand, due to unusually warm weather and fund repositioning in commodity markets, offset the impact of OPEC cuts. Despite a sharp fall in US crude stocks, high inventories at the NYMEX delivery point of Cushing, Oklahoma, are contributing to the persistence of higher forward prices.
Global oil product demand has been cut by 450 kb/d in 4Q06 following large US data revisions, unseasonably mild temperatures, fuel switching and lower apparent demand in the FSU. Some of these factors, together with a lower US GDP assumption, contribute to a reduction in forecast global demand growth to 1.6% in 2007 (85.8 mb/d).
World oil supply rose by 110 kb/d in December to 85.4 mb/d, as strong recent non-OPEC growth continued. However, revisions to Norway, Mexico, Canada and Latin America lowered non-OPEC supply by 0.3 mb/d to 52.3 mb/d in 2007. Mild weather cut the 4Q06 ‘call on OPEC plus stock change’ to 29.4 mb/d, but the 2007 call was lifted by 0.1 mb/d to 28.6 mb/d, only marginally below the average call in 2006.
December OPEC-11 crude supply fell by 155 kb/d to 28.8 mb/d, but persistent disruptions to Iraqi and Nigerian supply limit effective spare capacity to 2.5 mb/d. Indications of further cuts in 1Q OPEC output follow the recent fall in prices and an agreement in Abuja to curb supply by 500 kb/d from February. Angola became an OPEC member from January 2007.
OECD refinery throughputs increased by 1.1 mb/d in November to average 39.1 mb/d. Weekly data suggest a further increase of 0.6 mb/d in December to a winter peak of 39.7 mb/d. Global throughputs are expected to decrease over the course of the first quarter, as maintenance takes place sequentially in the US, Europe, the Middle East and Asia.
OECD total industry oil stocks continued to decline in November, falling by 33 mb as product draws offset a modest crude oil stock build. Provisional data suggest the trend continued in December. While total OECD stocks are 41 mb higher than one year ago at 2,712 mb, forward demand cover fell by one day from October to 54 days.