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Global > Knowledge Base > Commodity Prices > Oil prices in 2010-11

Oil prices in 2010-11

Brent crude oil prices fell sharply from $85 pb in April to around $70 pb in early June 2010 reverting to the $70-80 pb range seen from mid-2009 to 2010Q1.

Brent crude oil prices fell sharply from $85 pb to around $70 pb in early June 2010, due to mounting concerns about the knock-on effects of the euro-zone debt crisis on world economic growth. This weakness was also reflected in a weakening in global equity markets. This decline in confidence in oil and equity markets occurred despite attempts by EU finance ministers to guarantee liquidity to vulnerable economies in the euro zone. However, according to the IMF's April 2010 World Economic Outlook, oil prices, after recovering rapidly from their low point of $40-45 pb in 2009Q2, had fluctuated between $70 and $80 pb between mid-2009 and 2009Q1, before picking up briefly to around $85 pb in April. The bounded fluctuations reflected opposing effects from the adjustment of oil demand and supply to the normalisation of economic and financial conditions respectively. Oil prices at the lower end of $60 pb were supported by the rebound in global oil consumption as the revival in world economic recovery gathered momentum.

On an annual basis, the IEA estimated that global oil demand fell by 1¼ mbd (-1½%) in 2009 to 85 mbd. This reduction was larger than expected, given the usual historical relationship (based on data for 1995-2008) between global oil demand and global GDP. The main reason for the decline was the sharp decline in demand from the OECD industrialised economies. In contrast, oil consumption in emerging and developing economies, led by China, rose by 1¾%, more than would have been expected on the basis of GDP elasticities and actual GDP growth experienced by these countries in 2009.

Meanwhile price pressure at the upper $80 pb end was restrained by the recovery in global oil production by OPEC and non-OPEC suppliers from the low point recorded in 2009Q2. Production by OPEC-11, subject to production quotas, increased by over ½ mbd from the low reached in January 2009. Non-OPEC supply also increased in 2009, rather than falling as industry analysts had expected earlier in the year, largely due to higher offshore US output from the Gulf of Mexico and a recovery in production in Russia, reflecting in part expectations of tax cuts on exports from the eastern Siberian oil fields, one of the new areas of development in Russian oil production. The supply increase lagged the revival in demand and the global oil market gradually moved from excess supply in early 2009 to a more balanced demand-supply position in the first four months of 2010.

The outlook for oil prices over the second half of 2010 and 2011 depends crucially on the interaction between the upward pressure from increases in global oil demand as world economic growth accelerates (assuming the euro zone debt crisis has no significant impact in restraining activity) and the supply response. The IEA's May 2010 Oil Market Report expects global oil demand to rise by around 2% (1½ mbd) to 86½ mbd in 2010, while the call on OPEC supplies (ie the difference between global demand and non-OPEC production) is forecast to rise markedly to around 28¾ mbd in 2010, since non-OPEC output is expected to rise modestly by just ¾ mbd to reach 55¼ mbd. The Deepwater Horizon oil spill in the Gulf of Mexico is not expected to affect significantly that region’s production, although it may lead to tighter safety measures and delay further offshore oil exploration. However, with both OPEC spare capacity and OECD inventories still above their historic averages, the IMF expects the upward pressure on oil prices to remain moderate over the short term, assuming the there is no significant change to the medium term outlook for the oil market. Nonetheless, with OPEC expected to supply a greater proportion of world oil demand in 2010, the evolution of oil prices will depend crucially on the readiness of OPEC producers in the Middle East and North Africa to use their spare capacity.