Even OPEC’s announced cut of 2.2 million barrels per day (Mbd) couldn’t send oil prices higher today. Recessionary demand continued to out-muscle supply cuts as prices remained below $45 per barrel (more than $100 below the July peak). Two new reports confirming US demand woes ruled another day of oil price determination.The first report, the EIA oil inventory weekly, showed short-term demand weakness. Lower petroleum demand allowed crude supplies to increase again this week to more than 7% higher than last year’s level. Distillates (diesel and heating oil) demand was down 12.8% and gasoline a smaller 1.2%. The tightest supplies continue to be in propane, which fell a bit due to 9.4% higher demand than last year. Jet fuel demand was down ~12% as fewer people are flying this December. The overall picture of ~5% lower demand remains.
The second report, an early release of the EIA Annual Energy Outlook, showed long-term demand weakness. In a big shift from last year’s report, it projected US demand for oil will remain flat through 2030 — unlike the almost constant demand growth we have experienced ever since oil’s North American discovery in ~1860. While it does project some increase in liquid fuel demand over the next 22 years, the EIA believes that incremental demand will be met by increasing biofuels supply [Stay tuned for more dramatic details about the Annual Energy Outlook in the days ahead].
Additionally, OPEC’s announced cut, while a record amount at 2.2 Mbd, is not completely trusted by the market. Some members often produce beyond their quota, so the oil price may not significantly react to the cut until the lower supplies are visible via lower shipments around the globe. These numbers should be available by mid-January.
So, the price may rise above $50 per barrel if OPEC executes the cut they announced AND there is no further collapse in oil demand beyond current EIA predictions. Another wild card is the production levels for non-OPEC producers Russia, Kazakhstan, and Azerbaijan — who have stated some willingness to cut production in sync with OPEC. These three oil producers have a similar dependence on oil revenue and hope to prevent a further spiral downward in prices.
Bottom line: Even a record cut by OPEC has little ability to increase prices in today’s deep recession. News from the US, the world’s biggest consumer of oil, is full of low demand in the short-term and stagnant demand in the long-term. As I’ve posted here before, this reduction in oil consumption is good for the climate and can help us reduce greenhouse gas emissions in the decades ahead as long as we keep our focus on smart efficiency and low-carbon energy deployment.
Tags: Annual Energy Outlook, climate change, EIA, Oil, OPEC, recession