As part of my series reviewing energy commodities in 2010, I present here the main changes that occur to crude oil price (WTI spot price) during 2010, and show what could affect crude oil price in 2011.
Crude oil price – 2010
Crude oil price rose by nearly 13.8% from January to December of 2010; despite it’s not as near as the yearly price hike in 2009 of over 78%, 2010 still showed strength and outperformed natural gas prices (Henry Hub).
In the following crude oil charts for 2010 are the average monthly prices showing the upward trend mainly in the last few months of the year.
Does this rise could be related to the increase demand in the U.S. for crude oil or the lack of supply?
After all, in the U.S., energy prices played a lead role in the rise of inflation during 2010 — the current level of inflation (Dec 2009- Nov 2010) is 1.1%, and energy prices increased in the U.S. by 3.9% (according to BLS).
It could be, but I think this isn’t the real story.
In the following table are the Monthly U.S. Ending Stocks of Crude Oil and Petroleum Products (Thousand Barrels, the green columns) & Monthly U.S. Product Supplied of Petroleum Products (Thousand Barrels per Day, the crimson columns), or in short the supply and demand in the U.S., respectively.
The table shows no apparent trend for either series during 2010, nor is there any strong correlation between the two.
It does show, however, that the decline in supply in the last several months of the year happen as crude oil price increased.
The reason for this decline in stock on the one hand and rise in crude oil price on the other, could be partly explained that during September- October major refineries in the US and Canada undergone maintenance repairs, while in France there was a workers strike that also slowed down the work its main refineries. As a result, there was a decrease in supply of gasoline, which drove crude oil price up.
When looking, however, on the U.S. Ending Stocks of Crude Oil and Petroleum Products (Thousand Barrels) on a yearly scale it seems that currently there is a high level of crude oil stocks and despite the decrease in stock during the year, it’s still a high level in an historic perspective.
Therefore, it could mean that other counties such as China, the second largest consumer of crude oil, and one of the biggest importer of crude oil, is responsible for the crude oil price rise during 2010.
According to Bloomberg, they estimate that China’s demand rose by 20% during 2010; they expect it to rise by 6.3% in 2011.
Crude oil price – 2011
When analyzing the prospects of crude oil price in 2011, there are several aspects worth considering:
- World demand growth: The expected increase in world demand for Oil in 2011: IEA (International Energy Agency) expects petroleum demand worldwide in 2011 to be 88.8 million barrels per day, which is roughly a 1.6% increase in demand for oil in 2011 compares to 2010; in 2010 the daily consumption was estimated at 87.4 MB/d.
- OPEC, which is responsible for about 40 percent of the world crude oil supply, announced, in a recent OPEC meeting, it will sustain its current quota of 24.845 million which was set back in 2008.
- China’s demand in 2011: On the one hand, Asia’s demand for energy is responsible for 70% of the world energy growth in the past couple of decades, in which China was responsible for 40% of it. Also, China’s energy demand nearly tripled since 1990. On the other hand, as presented above, it’s expected that China’s growth in demand for crude oil will decrease compare to 2010. This slowdown could be because of China’s fight to cool down its economy as there inflation pressures increase (as of Nov 2010, the Y-2-Y inflation rate was 5.1%). Therefore, China’s role in driving crude oil price higher will remain to be seen.
- U.S. dollar: the U.S. has taken several steps in the past couple of years that reduced the value of the dollar against major commodity markets and drove them high (such as gold prices). I refer to the very low interest rate which has remained at 0.25% in 2009-2010, and the quantitative easing phase 1 and 2, in which the Federal Reserve gave loans to U.S. banks in an attempt to stimulate the U.S. economy. As the U.S. dollar continue to loose its appeal and worth, investors will keep on relying on the commodity market and consequentially will drive commodities prices up, including crude oil price.
- Europe’s recovery: the Euro zone is also a key player in consuming crude oil, and as the year will progress, Europe’s recovery from the recent slow down could affect crude oil demand and price.
All in all, although the demand for crude oil in the U.S. doesn’t seem to drive crude oil price up, there are plenty of other reasons why we should expect crude oil price to continue rising in 2011.
For further reading:
- Should we be concerned with Crude oil prices in 2011? (in this site)
- China’s effect on Crude oil prices in 2011 –Dec 21st (in this site)
- Natural gas spot price in 2010 and projection to 2011 (in this site)