• Large Output Cut By OPEC Bids Farewell to 2008
Global Investment House – Kuwait - Monthly Oil Bulletin December 2008 - There was no respite as the US crude dived to US$40.0 per barrel mark for the first time in four years in what turned out to be an extremely volatile month for oil prices. US crude lost 23.5% during the review period (17 Nov-16 Dec, 2008) to settle at US$43.60 per barrel mark, the lowest level since Jan 2005. US crude has lost 69.9% since it reached an all-time high of US$145.16 per barrel on 14 July, 2008. The record output cut of 2.2mn barrels by OPEC failed to jack up the prices as the state of the world economy became an overriding concern for the investors. The impact of the credit crunch and the ensuing global slowdown is now being reflected in the data as firms are opting for production cuts and a leaner workforce, which is likely to restrain oil demand in 2009. The confidence in the financial system, which is already low, was further shattered when a major fraudulent scheme was unearthed on Wall Street. OPEC basket and Kuwait export crude price followed the same pattern declining by 17.0% and 15.1% during the review period to settle at US$40.74 and US$38.58 per barrel respectively.
US crude oil price increased by US$4.46 (10.2%) on 11 December, 2008 as Russia indicated its willingness to join OPEC in production cuts. Oil prices fluctuated wildly during the review period as positive sentiments arising out of an expected major output cut by OPEC were dampened by a constant flow of negative news on the economic front. Central banks around the world moved aggressively to tackle the credit crunch by slashing interest rates. US slashed its interest rates on 16 December, 2008, bringing it down to a range of 0-0.25% from 1.0%. Despite the aggressive measures being taken there is a fear that it won’t be enough to stem an impending global economic slowdown thus casting a shadow on oil demand projections. The slowing down of demand is also being reflected in the world stocks which are now trading at a forward cover of 56.3 days which is higher by around four days over the five year average.
US crude oil price has lost 69.9% in five months since it reached an all time high of US$145.16 per barrel on 14th Jul 2008. The World Bank recently revised its economic growth forecast for 2009 to 0.9% reflecting the impact of the current financial crisis. The gloomy outlook and the consequent weakening of oil demand have cast a bearish spell on the oil markets. The impact of the credit crunch has started to filter through the numbers with firms around the world opting for production and employee cuts to survive the financial storm. Around 2.0 mn jobs have been lost during the year in US with a staggering 0.55mn jobs in the month of November. The proposed bail-out package for the three big auto companies in the US was rejected by the US Congress which has created more uncertainty forcing the US government to explore other options. The weakening of the US economy is bound to slow down growth in emerging economies like China and India and other high growth countries, which have been the major contributors to oil demand growth.
Chart 1: Daily Price Trend Nov/Dec 2008
Source: OPEC, EIA, Global Research
US crude oil prices declined by 16.3% during the first week of the review period to US$49.03 per barrel as concerns over the economy were entrenched by lower corporate profitability and major workforce retrenchments. The oil prices recovered by 11.0% in the second week ahead of the OPEC meeting in Cairo and moves by China and Europe to tackle the financial crisis. The third week saw prices fall down to their lowest level since 21 July, 2004 to US$40.81 as OPEC decided to postpone the decision for output cut and release of worse than expected job data in the US. The steepest decline was witnessed on 1 December when oil prices slid by US$5.15. Oil prices recovered in the fourth week by 13.4% to US$46.28 per barrel as Russia indicated its plan to join OPEC in output cuts. The OPEC meeting took place in Oran, Algeria on 17 December, 2008 in which it decided to cut the output by 2.2mn barrels. This along with the interest cuts in US on 16 December and fall in the value of the US$ failed to prop up the prices. US crude settled at US$43.60 at the end of the review period. OPEC basket and Kuwait export crude price followed the same pattern declining by 17.0% and 15.1% during the review period to settle at US$40.74 and US$38.58 per barrel respectively.
Refinery Margins and Utilization
Expected lower demand in view of lower world economic growth pulled the refining margins down further despite the forthcoming winters which usually increases the demand and boosts the margins. Refining margins for WTI crude at US Gulf plunged by US$3.39 per barrel over the previous month to reach a negative US$1.18 per barrel. (OPEC). There were no exceptions as Brent crude oil margins at Rotterdam decreased to US$4.35 per barrel in November from US$6.14 per barrel in October while refining margin for Dubai crude oil in Singapore declined by US$3.09 per barrel in November to US$2.61. The gloomy world economic outlook is likely to maintain pressure on refinery margins going forward
Though refinery utilization rates usually increase in November to cater for higher demand in the winter season, this time around low refining margins and gloomy demand outlook has not led to significant increase in utilization rates in the US. Refinery utilization levels in US increased to 86.8% in November from 85.1% in October. Utilization rate in Germany remained unchanged at 92.1% in November. However utilization rates went up by 2.3% in Eur-16 to 85.7%. There was also a surge in utilization rate in Japan by 5.7% to 82.3%.
Throughput in the USA increased by 0.31mn barrels per day in November to 15.15mn barrels per day. Throughput in Eur-16 and Japan increased by 0.33mn and 0.27mn barrels per day respectively. Throughput in UK and Italy increased by 0.03mn and 0.06mn barrels per day respectively.
Throughput is likely to decline going forward as falling demand in view of lower world economic growth will put pressure on the refining margins.
