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2010 - Mixed outlook for oil demand & prices

Posted by Andy McDonough

Tuesday, 22 December 2009 15:11

The glitch in the global economic recovery caused by Dubai’s debt problems was largely smoothed over last week after Abu Dhabi agreed a $10-bn bailout of its neighbour.
The news came as a welcome relief for global stock markets and returning confidence also had a part to play in strengthening the oil price.

Certainly, the fact that the markets were able to digest such an unpleasant surprise is a good measure of how robust the recovery really is, but it is not enough to help persuade us that oil demand, or prices, will post significant gains next year, leaving the outlook still very mixed.

US economic data are still improving. Industrial production in the States rose by 0.8% in November, above analysts’ expectations. This has yet to lead to a substantial draw in the country’s large middle distillate inventories, but it suggests the recovery in US oil demand might quicken in 2010.

However, other economies have lost momentum, having initially seemed to be on the road to recovery. In contrast to the US, the Eurozone’s latest industrial figures for October show a decline of 0.6% month-on-month, undermining the optimism that had resulted from September’s small rise. Given that governments are gradually winding down their fiscal stimulus programmes, such a decline might not prove to be a one off — indeed the Bundesbank has said it expects German GDP growth to slow in 4Q09 as state programmes are withdrawn — and a struggling industrial sector does not bode well for the region’s oil demand in 2010. Moreover, the financial position of several European governments could worsen considerably in 2010, raising the spectre of an ugly reaction in the bond markets.

Despite this uncertainty, ExxonMobil was still sufficiently confident to acquire XTO Energy, a US independent focused on the development of unconventional gas resources. The $41-bn deal is probably partly explained by the fact that there was no similarly attractive option in the oil sector, but the US super major is also hedging its bets.
Its lack of investment in the renewable energy sector is well documented, but by purchasing a domestic gas producer it is increasing its exposure to a fuel that is likely to take a larger share of power demand if tighter US emission regulations are imposed that make burning coal a less profitable business.

Between April and September '09 refinery utilisation increased in both the OECD and the non-OECD areas, but refinery runs in the Asian countries increased at roughly twice the rate of the EU16, Russia and the US, reflecting the fact that China, and to a lesser extent India, have been the key drivers of oil demand growth this year.
It is also true, however, that both these countries have recently expanded their refining capacity — India’s Jamnagar facility began operations in December ‘08, while China has opened several new refineries this year, such as CNOOC’s Huizhou unit.

The increase in throughputs is partly due to these new plants, rather than solely because of an increase in domestic fuel demand.

The large fall in refining runs in the West in October is a reflection of desperately poor refining margins in the OECD.

Global Arab Network

Extracted from "Global Oil Insight Service: the Weekly Outlook" by CGES