Also, Vitol projects oil demand around the world to increase in 2010-2011, but demand will remain below the high seen in 2007.
“Contrary to popular opinion, oil prices have remained remarkably range bound for the past 12 months — within a $70 to $85 a barrel price band,” Taylor said.
“Oil markets have stabilised and returned to a more recognisable shape after several years of unprecedented price swings and volatile underlying macroeconomic conditions,” he added.
Vitol trades over 5.5 million barrels of crude oil and products on a daily basis.
In addition to its trading business, and its storage and terminals business, VTTI, Vitol has an exploration and production business which includes assets in Kazakhstan, Russia and Azerbaijan and a 40% share of the Galoc field in the Philippines.
Taylor said that demand for oil was tempered in 2008 and 2009 by the recession, resulting in the first annual declines for nearly two decades.
However, an increase in economic activity, albeit partial and regional, has prompted a material rebound in oil demand this year.
“We currently expect 2010 oil demand to increase year-on-year by 1.6 million b/d and demand next year to increase by 1.3 million b/d, but with potential upside,” he said.
However this will still leave 2010 demand below 2007 levels — some three years of growth have been lost.
The sharp fall in oil demand prompted OPEC to cut production by nearly 2 million b/d in early 2009, and production has remained below the 2008 level ever since.
Combined with an increase in production capacity, OPEC has around 6 million b/d of spare capacity.
This means OPEC has the means to prevent prices moving up to levels it perceives as being too high.
The concept of a price ceiling exists today in a way that it simply didn’t when prices rose to $150/bbl in the middle of 2008, and a price band of $70 to $85/bbl is widely viewed as meeting producers’ needs while being simultaneously “acceptable” to consumers.
“We see prices progressing to the higher end of this range over 2011,” Taylor said.
The return to spare capacity in OPEC has reduced the specter of “peak oil,” at least in the short term, and so, too, have developments in non-OPEC supplies.
In 2010, Vitol expects these supplies to increase year-on-year by 1.3 million b/d and in 2011 to rise by 0.6 million b/d.
However, next year’s increase consists largely of natural gas liquids, condensates and biofuels.
In contrast, conventional crude production is forecast to remain flat.
Spare capacity is not confined to oil supply. There is also clear evidence of enduring surpluses in both the tanker and refining industries, the consequence of a significant new-build program — triggered by the booming returns in the middle of the decade — coming to market just as the recession destroyed demand.
The underlying surplus in all parts of the oil market is reminiscent of the structure seen in the two decades leading up to 2003.
The result today is lower transportation costs and refining margins, narrower price spreads between oil products and a more stable crude oil price in the past 12 months.
Vitol’s forecasts anticipate these surpluses will persist and prices will continue to remain in a relatively narrow band.
“We do expect a bias to the upside of that range as our forecasts indicate OPEC will need to make more oil available in the second half of 2011, driven by growing demand in the developing world, due to demographics and rising gross domestic product a head, as well as increased political risk in the system, for example due to continuing uncertainties over Iranian oil exports,” Taylor said.
The return to the familiar market pattern of surplus, and focus on OPEC decisions and political risk, should not disguise some of the major changes in oil price formation.

OTHER INFLUENCES

There are a number of influences that help drive the market that were much less important five years ago.
“We must now look at currency and equity market developments just as much as fundamental oil market developments,” he said.
While oil prices have moved sideways on an underlying basis in the past 12 months, there has been high volatility within the trading range with many of the changes in direction and sentiment driven by economic news and movements in currency and equity markets.
As economic activity inevitably picks up and oil demand follows, it may well provide a reason for investors to move further into oil and contribute to rising prices.
Although futures markets can never be expected to forecast prices, they can arguably tell us where the market feels the balance of risk to prices lies.
Throughout the past 12 months, the five-year forward price has traded at a consistent premium to the spot market, a function of the excess inventory in the system during the period but also a reflection of the underlying belief that oil prices must move higher in the next few years.
“What we are seeing across all parts of the energy sector is that market forces have worked and this is reflected in the price structure,” Taylor said.
While the political need for increased regulation is clear, regulators need to take care that burdening suppliers of energy products with additional regulatory costs, as the suppliers risk-manage their price exposure with risk management instruments, does not lead to yet higher prices for end consumers.