Right now the price of crude is $83 on NYMEX. Global daily demand for oil, assuming no change from the 2009 average, is 84.9 million barrels a day (mb/d) according to the IEA’s December Oil Market Report.

The global economy is in flux and it’s anyone’s guess which factors will exert the most influence over demand for crude oil in 2010. The question for many has been whether growth in China and other non-OECD countries like India and Brazil will be enough to offset declining demand from North America and the United Kingdom. An added factor that has received little attention is the historic levels of global crude and distillate supplies currently in storage—a massive overhang of 159 million barrels—the likes of which have not been seen for 26 years.

Demand Rebound

The majority of analysts covered on this site, including Goldman Sachs, the IEA, and the EIA, declared it likely that oil demand will improve in 2010. Despite the economic slowdown felt most acutely by mature economies, these analysts find the surprising growth of developing nations, particularly China, in the same period as reason to expect a broader market recovery this year.

The most optimistic within this pack is the world’s largest energy trader, Goldman Sachs, who has predicted global demand to accelerate to 86.4 million barrels a day (mb/d) from 2009’s 84.9 mb/d due to growing consumption in China, India, and Brazil. Citing dwindling production levels in the world’s largest oilfields, Goldman Sachs projects that supply will fail to meet needed levels of demand in 2010, which will bring about a price hike to $90/barrel this year and $110 in 2011.

That demand will outpace supply is a perspective found in the results of a November Reuters poll of “ten prominent oil-tracking organizations,” and in Saudi Arabia’s oil minister Ali al-Naimi, who said in September that a demand rebound would quickly make the massive stockpiles of the commodity irrelevant. Despite vacillating positions on this issue in every report since October, the International Energy Administration has also most recently come out in favor of a short-term demand spike, predicting that 2010 demand will rise to 86.3 mb/d, and crude prices upwards of $100.

A Long Bottom

Other agencies, though agreeing that global oil usage is poised to rise, place this event farther off in the future. Relatively weaker demand estimates from OPEC, JP Morgan and the EIA reflect greater weight attributed to the economic recession and floating oil stockpiles.

OPEC said demand would rise only later in the year, and in the first part of 2010 would drop further. In its December report, it predicted a daily global consumption of 85.13 million barrels in 2010, a mere 0.82 mb/d increase over 2009 levels. As explanation, OPEC noted the extremity of the global oil glut. JP Morgan also cited the record supply glut in its demand forecast, which predicted a 1.1 mb/d increase.

In early December, the U.S.-based EIA lowered its national 2010 demand predictions at the same time that OPEC and the IEA were upping predictions for worldwide demand. While those other organizations were responding to new data from China and other non-OECD countries, the EIA was responding to a weaker-than-expected US economy, though the source of this newer wariness was not shared its Report Summary. Even without this minor adjustment, the EIA prediction would still be on the low end of the spectrum, at 85.22 mb/d, a 1.1 mb/d increase. The agency attributed “almost all” of expected 2010 oil demand growth to developing countries, underscoring the major shift in oil demand from wealthier to poorer nations.

In contrast to a Reuters poll mentioned earlier, a BDO Seidman survey of 100 American small and medium oil and natural gas companies predicted that 2010 oil demand will not rise at all.

Demand Downturn as Market Correction

Only a handful of voices covered on HeatingOil.com believed oil demand could fall in 2010. These were motivated not by a belief that another economic downturn is imminent, but by skepticism for the “realness” of current oil market figures. A December Economic Times article and European oil trader Trafigura have posited that a price bubble is in the works, similar to the one that grew in the housing market a few years ago and caused the mortgage crisis of 2007 and subsequent credit crunch when it finally burst. Both pointed to the world’s massive oversupply of oil as reason for concern over the market’s high prices.

What’s curious is that establishment agencies such as the IEA have also repeatedly voiced strong concerns about the high price of oil, but have done so while neglecting to mention the supply overhang. In November, Goldman Sachs confessed in a report that it had “underestimated” the impact of the distillate oil glut, but made no adjustments to its 2010 demand predictions.

Price hedging activities by the Mexican finance ministry and oil traders as observed by analyst Phillip Verleger support the idea that the possibility of a coming bubble burst is more widely accepted than the highest-ranking analysts would have one believe. However, other competing theories such as peak oil complicate the picture and make it difficult to reject optimistic demand predictions.

In Short

The near-unanimous consensus is that oil consumption will rise this year as long as world economic conditions improve. Key in this “if” is the economic growth of non-OECD countries (developing countries), which has taken place at nearly the same rate in the last few years as the economic slowdown of OECD countries (developed countries). Optimistic analysts believe that non-OECD demand growth will continue even as demand from developed countries remains flat. Very optimistic analysts believe that non-OECD demand will rise sharply, and/or that OECD demand will improve moderately.

However, the degree to which any nominal demand growth actually registers as real growth will depend on the speed at which countries absorb the distillate supply overhang, and to a lesser extent the crude overhang. If this does not happen quickly, then it forms another factor encouraging flat demand.

Widely anticipated as a year of transition by optimists, it will take time to see how each factor affects the others.

Note: This summary excluded discussion of oil prices, which are heavily affected by factors outside of real demand such as inflation, the strength of the U.S. dollar, and speculation in the oil futures market.