What will oil do in 2010?

The Organisation of the Petroleum Exporting Countries (Opec) met on December 22 in Angola and decided to adhere to their production quota over the next few months. This was against the backdrop of a huge stockpile, which is taking time to get exhausted. Although the American investment banker Goldman Sachs and the International Energy Agency (IEA) chief Nobuo Tanaka perceive an uptick in crude demand in 2010, Opec, in its latest oil market report underscored a more balanced outlook, driven by concerns that surplus oil will weigh considerably on price, at least during the first half of the coming year. The report says,

“A more detailed look at the supply/demand balance indicates that fundamentals will continue to be weak in the first half of the year before improving in the second half, as reflected in the demand for Opec crude.”

The decision about Opec quota is usually determined by the Opec’s perception about the call on its output of conventional oil. The call is usually considered as an expected demand of Opec output after accounting for non-Opec output, adjustment in stockpiles, and output of natural gas liquids and non-conventional oil.

In its latest oil market report, Opec underscores that it expects increased consumption in the US and growth in the developing world, especially China and India, next year to boost world oil demand to an average of around 85.1 million bpd. However, this projection lies well below the 86.3 million bpd predicted by IEA in its latest revised forecast.

Non-Opec supply is perceived as rising by around 3,10,000 bpd next year with the lion’s share of the increase coming from Russia and other countries from the former Soviet Union. Moreover, supplies of Opec natural gas liquids and non-conventional oils —which are not subject to the producer groups’ output quotas —are expected to average around 5.26 million bpd next year, an increase of more than 9,00,000 bpd since last year.

However, what Opec actually ends up producing and its implication for world oil prices depends largely on the compliance of Opec as a whole with the decided quota. Interestingly, Opec’s latest oil market report indicates that Opec has actually been grappling with maintaining compliance with output curbs during the current year. According to a recent calculation by Reuters, compliance with the 4.2 million bpd of output cut, which was agreed upon at the acme of the financial crisis last year, has fallen progressively to a...