Global Arab Network | Global oil demand in 2010 moving to pre-financial crisis era

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Global oil demand in 2010 moving to pre-financial crisis era

Global Arab Network - - John Short

Wednesday, 24 March 2010 10:31

Three years on, though, the world is a very different place, with nearly 1.5 mbpd of additional non-OPEC supply and a further 0.5 mbpd of OPEC NGLs.
OPEC’s spare production capacity has risen from less than 2 mbpd to 6 mbpd, while refining capacity is now ample.
While OPEC output restraint will support prices, there should be little upward pressure from market fundamentals.

According to MONTHLY OIL REPORT (by Centre for Global Energy Studies) Global oil demand appears to be on the path to full recovery and could well have returned to the levels it reached during 2007, barring a major setback to the global economy. However, the oil world has changed dramatically in the intervening period, removing the pressures that were driving oil prices towards their peak of almost $150/bbl. Rising non-OPEC supply, ample spare crude oil production capacity and a big boost to refinery capacity are all playing a part in limiting the upward pressure on oil prices and should ensure that another price spike is avoided.

Global economic recovery and cold weather in the Northern Hemisphere combined to return oil demand to positive year-on-year growth in 4Q09, after five consecutive quarters of decline. The growth was strong enough to result in the first global stock draw since 1Q08, helping to put a floor under oil prices. Although inventories are expected to build again in 2010, OPEC’s continuing supply restraint in the face of rising oil demand should be enough to prevent prices from slipping back. Although the Organisation’s aggregate oil production has risen by nearly 1.4 mbpd since March 2009, the increase has been in response to rising demand for its oil and has done little to undermine prices, leaving the Organisation in its comfort zone when it met at its new Vienna headquarters to review the market.

The market tensions that were pushing oil prices ever higher during 2007 and the first half of 2008 have disappeared over the intervening period, removing much of the upward pressure on oil prices. Non-OPEC oil production, which had seemed to some to be in terminal decline, began to rise again at the beginning of 2009, thanks to the start-up of a number of large projects in Russia, the US Gulf of Mexico and Brazil. By the beginning of 2010, aggregate non-OPEC oil production (including biofuels) was 1.4 mbpd higher than at the start of 2008 (including Indonesia throughout), while OPEC’s production of NGLs and other liquids, which are not regulated by the Organisation’s quota system, was up by almost 0.5 mbpd.

Of course, this output increase has been offset by a corresponding cut in OPEC’s crude oil production, which is down by more than 2 mbpd over the same period on a constant-membership basis. However, the shut-in production has added to the Organisation’s spare capacity, augmented by the completion of major new upstream projects in Saudi Arabia that were begun well before oil demand collapsed. The net result is that OPEC’s spare production capacity has risen from less than 2 mbpd in early 2008 to more than 6 mbpd now.

Although OPEC’s discipline means that this spare capacity is not exerting downward pressure on prices, its mere existence is helping to curb upward pressures. It is not only upstream that capacity constraints have vanished. Around 1 mbpd of new refining capacity has been commissioned in Asia since the beginning of 2008 and more is on the way. While this new Asian capacity is fully utilised, runs have fallen sharply in the Atlantic Basin. OECD refinery utilisation rates are below 80%, yielding nearly 10 mbpd of idle capacity, according to the IEA. With spare capacity throughout the oil supply chain, it is difficult to see much upward pressure on oil prices from market fundamentals in 2010.

Global Arab Network

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