Organisation of Petroleum Exporting Countries (Opec) sees a depressive contango (future price exceeding current price) that had built up in first two months of 2009, easing in March.

The impact of the development was evident on freight rates of very large crude carriers (VLCCs) and smaller crude carriers, Opec said. Analysts say the contango particularly eased towards the last quarter of March.

Yesterday, crude for June delivery at the Intercontinental Exchange (ICE) stood at $52.88. Dated Brent spot stood exactly a dollar below at $51.88 a barrel. On the other hand Brent spot prices have been higher than the WTI futures for the past few weeks.

"A drop in crude stocks at Cushing, Oklahoma, supported narrowing of the contango spread The contango on the forward structure eased in March with the first/second month average spread down by $2.44 to $1.44/b from the previous month," Opec said in its new report.

Tim Hurst Brown, a London-based energy analyst said that the contango particularly eased in the last fortnight of March.

"The easing has been greater in the past fourteen days," Brown said.

Release of the Opec report coincides with an update from the Energy Information Agency (EIA), which on Wednesday disclosed a 5.6 million barrels increase in US inventory to 366.7 million barrels in the week to April 10. This exceeded expectations of analysts. On Tuesday, the American Petroleum Institute, an industry group, said crude inventories last week rose by 6.5 million barrels. According to market sources, inventory levels in China are also high.

Since high oil inventories in the US and China usually translate into a deeper contango, its easing has taken analysts by surprise. "There is a lot of involved economic theory about the forward structure of oil prices. One idea is that the contango eases when most storage is full and so additional storage becomes very expensive; or when production cuts are sufficiently deep that stocks begin to fall. Another view is that the high levels of stocks drag down the forward curve. I can see both of these mechanisms operating," said Robin Mills a Dubai based oil economist.

Analysts say that the easing of contango will ensure that the hoarding of oil in ships stops. According to market reports in February, an amount of oil equal to a day's consumption of the world (about 83.5 million barrels a day) was being stored in VLCCs. The impact is perhaps most visible in the drop in VLCC freight rates.

"On average, the VLCC spot freight rates were 13 per cent lower in March compared to the previous month, yet 51 per cent lower compared to a year earlier," Opec analysts said.

"It was reported that about 80 VLCCs were fixed out of the Middle East compared to around 100 in February," they added.

The Opec report did not forecast possible crude prices. However, in the light of recent developments, analysts have calculated a short-term and a long-term forecast. Mirabaud Securities holds the view that crude will average at $50 a barrel in 2009 and at $75 a barrel in the long run. "We see crude rising to and stabilising at a point midway between $50 a barrel and $100 a barrel in the next two to three years," said Brown.

Opec also revised its demand forecast for 2009 by 0.4 million barrels a day. "World oil demand in 2009 will fall by 1.4 million barrels a day," Opec said reducing its earlier forecast of the figure declining by one million barrels a day.

Analysts say the stubborn oil price and perpetually sliding demand come as a result of high level of oil stocks, low level of compliance to Opec's cut instructions and abundant availability of gas and its liquefied products.

"I think we saw some recovery in oil prices, although falling back again a bit recently. The problem seems to be that there are still repeated downward revisions in demand despite some signs of economic recovery. Very high levels of stocks drag down prices. Opec now seems to be focusing on compliance [which is unlikely to improve much] rather than further cuts. And there may well be additional influence from abundant gas in North America and LNG elsewhere, displacing some oil demand," Mills said.

While it was oil demand in developed countries that had been effected so far, the Chinese demand went into the red recently, Opec noted.

It expressed fear the other Asian economic giant India is slowing down thus impeding oil demand. "The world economic recession continues to erode oil demand growth, particularly in the US, Japan and China.

"OECD oil demand is forecast to decline over the entire year, while non-OECD is likely to see only minor growth of 0.13 mb/d. On a quarterly basis, China's apparent oil demand in the first quarter moved into the red for the first time since 2005."

Keeping OECD supplies aside, Opec which meets less than 50 per cent of the world's oil demand will see a substantial 2.1 mb/d drop in demand for its crude. "The latest developments in the market balance suggest that demand for Opec crude in 2008 is estimated to have averaged 30.8 mb/d, representing a decline of 0.3 mb/d from the previous year. In 2009, demand for Opec crude is expected to average 28.7 mb/d," the report said.

Opec noted that the alternative fuel sector has been even more badly hit during the crisis. "The heavily-subsidised biofuel industry has been hit badly by the financial crisis," the report said.

Middle East oil consumption to rise  

Middle East forecast will grow by 0.2 mb/d in 2010, Opec said adding that the region will be the only one where oil consumption will rise this year. “The Middle East oil demand is supported by energy intensive projects across th e region. The majority of the world oil demand growth this year will be attributed to the Middle East alone accounting for 72 per cent. An increase in retail prices along with slowing economic activities have already affected oil demand in some countries. Despite the expected slowdown in the region’s oil demand, it is projected that the Middle East oil demand will show the strongest growth in the world. Given the sluggish GDP this year, the region’s oil demand growth is expected to decline by half in 2009. Middle East oil demand growth is forecast at 0.2 mb/d y-o-y averaging 7.1 mb/d in 2009,” Opec said. 

Oil supply

In 2009, non-Opec supply is expected to increase by 0.3 mb/d, following a downward revision of 80,000b/d, the report said. “The adjustment is primarily due to lower expectations for China, Mexico, Kazakhstan, Azerbaijan and Vietnam. In March, total Opec crude production averaged 27.9 mb/d, a decrease of 145,000 b/d from the previous month.”

Supply from Opec stood at 27.9 mb/d in March, the report said. World oil demand is expected to average at 83.39 mb/d in 2009 of which Opec will meet 33.4 per cent of demand, the report added.

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