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"Oh, you want an oil price prediction? We don't do predictions," was BP chief economist Christof Ruehl's response to one question at the launch of BP's annual Statistical Review of World Energy yesterday - but then he near-enough made one anyway. As oil broke through $70 the same day, Mr Ruehl warned that people expecting prices to remain solid at current levels had 'reason to be worried'.
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As the 2009 review reveals, last year was marked by the largest drop in oil consumption in the US since the crisis of the early 1980s. As Mr Ruehl commented on the global macro-economic outlook from here, "a return to high rates of economic growth may prove elusive for some time." In attempting to better match supply to this reduced demand, Opec cuts mean several countries in the oil producing cartel had a lot of spare capacity on their hands right now. Mr Ruehl noted that history showed such idled production tended not to remain idle for very long. Opec quotas or not, it tends to "leak out through the back door" as countries sneakily produce over-quota, particularly when relatively high prices are too tempting to resist.
The ramp-up that has seen the oil price double since the start of the year certainly takes it well into that zone of temptation - while $70 is only half of last year's all-time high, it is still well above historical averages. Yet as Mr Ruehl emphasised, economic growth will remain weak, demand will remain depressed and there is ample spare crude production capacity available. Current prices are too good to be true, and a direct result will be some idled capacity starting to creep back - further increasing the downside risk to an oil price which once more, as it did last summer, defies fundamentals.
See also Speculators stay Opec's hand.
You can read BP's statistical review and accompanying commentaries on the BP website; it's all free and is an excellent resource for anyone interested in hydrocarbon markets.
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