Surging Oil and Gas Prices May Moderate in 2011

(Dec. 10) -- A bitterly cold start to winter in parts of the U.S. and blockbuster growth in China have helped boost global oil to its highest prices in two years, but economic headwinds could ease demand for petroleum in the year ahead.

A "giddy" demand for oil has made energy markets "jittery" as particularly cold winter weather came "hard on the heels of exceptional third-quarter global demand" that had pushed prices above $90 a barrel by early December, the Paris-based International Energy Agency, which acts as a think tank for the United States and other industrialized countries, said today.

Light sweet Texas crude scheduled to be delivered in January reached a high earlier this week of $90.76 on the New York Mercantile Exchange amid evidence of a strengthening U.S. economy and a faster manufacturing pace in China, compared with a low of $76.41 in late September.

And though some oil industry analysts suspect massive if quiet financial trading could be affecting the market, the IEA said supply-and-demand has been the biggest factor. Oil-thirsty China and other developing nations cranked up production at factories supplying goods to much of the world and continued to roll out fleets of new cars onto their streets.

"Fingers still point at shadowy 'speculative inflows' to futures and derivatives markets, but a more plausible foundation for price strength lies with now apparent third-quarter fundamentals," the IEA said. "Upward demand revisions have outstripped those for supply and suggest that global demand grew by a giddy 3.3 million barrels per day" from the same three-month period in 2009.

That surge in oil prices has been passed on to American drivers.

The Energy Department said last week that a gallon of gasoline was fetching a countrywide average price per gallon of $2.958, up from $2.694 on Sept. 27. In California, the average price as of Dec. 6 was $3.216 per gallon, up from $2.996 on Sept. 27.

The higher gas prices may also reflect higher refining costs. The respected think tank Cambridge Energy Research Associates issued a report Thursday saying costs of so-called upstream oil and gas facilities like refineries had risen 3 percent in the past six months after falling the previous year, and that the costs of operating those facilities were also rising.

But the IEA also predicts the climb in oil prices could moderate in 2011 thanks to a shaky global economy that "still faces considerable headwinds," including doubts about U.S. growth and the "continual turmoil in Europe."

The biggest question mark remains China, as the oil markets well know.

Today, after the Chinese government -- fearing its economy could overheat -- ordered banks to increase their capital reserves and thus reduce the amount of money they can lend to businesses, traders in New York pushed light sweet crude down $1.10, or 1.2 percent off Thursday's close, to $87.27 a barrel.

Demand for gas and other fuel increased worldwide oil demand by 2.5 million barrels a day in 2010, according to the agency's latest estimates. But it predicts growth in oil demand through next year will end up being just 1.3 million barrels a day.