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$80 per barrel - Upward revisions oil demand growth forecasts

Global Arab Network - - Rabih Serrai

Monday, 03 May 2010 19:26

Oil prices have broken through the psychological $80 per barrel barrier after several months of trying and failing. They show little sign of slipping back, despite OPEC’s usual (but misplaced) concerns about second-quarter weakness. While professing contentment with oil prices in a $7080/bbl range, comments from within OPEC suggesting that the Organisation would only act to formally raise output once prices topped $100/bbl added further bullish sentiment to a market that was already digesting upward revisions to global GDP growth forecasts, record levels of Chinese imports and a continuing belief that non-OPEC oil supplies have reached a plateau, above which they are unlikely to rise.

Oil prices are now almost $10/bbl above their first-quarter average and OPEC’s repeated warnings of second-quarter weakness look unconvincing. The second quarter of the year has not been a period of weakness, either for oil prices or for OPEC revenues for many years, nor has the Organisation had to cut production to support the market. Indeed, over the past seven years, only once, in 2003, have quarterly average oil prices, OPEC production, or OPEC gross oil revenues fallen between the first and second quarters.

The market appears to have dismissed, or perhaps just not noticed, the growth in oil supply. Although OPEC crude oil production has remained remarkably steady over the past six months, the Organisation’s production of NGLs and other liquids is rising sharply. Non-OPEC crude oil production, virtually stagnant since the beginning of 2004, is also rising once again, as the effects of the industry’s belated response to higher oil prices is felt. Aggregate non-OPEC crude oil production is up 0.8 mbpd year on year and the CGES expects further growth in the months ahead.

Demand-side factors seem to be dominating the market, though. The IMF has added support by raising its forecast of real growth in global GDP in 2010 from 3.9% to 4.2%, led by China and India. However, the Fund cautions that the recovery ‘remains dependent on highly accommodative macroeconomic policies’ and has warned that soaring public debt, if not contained, could have ’severe’ consequences for the global economy. China’s apparent oil demand in 1Q10 was more than 1.3 mbpd (18%) up on the same period in 2009 and almost 1 mbpd (12%) up on the pre-crisis 1Q08.

The oil market appears to have focused on what is happening in Asia, ignoring the warnings about the developed world. This should come as little surprise, since the industrialised countries of North America and Europe are adding almost nothing to global oil demand growth.

Indeed, between 2005 and 2009 OECD oil demand fell by 4 mbpd, while non-OECD increased by 6 mbpd, mostly in Asia. Government guarantees ensure that refining remains profitable in China, even though the level of profitability begins to taper off as crude oil prices rise above $80/bbl, so there is little incentive for the country’s refiners to reduce purchases. It would be interesting to see the impact on crude oil prices of a decision by the Chinese government to reduce the price threshold at which guaranteed refining margins begin to disappear, but there is no sign of Beijing taking such a step, as it pursues its goal of self-sufficiency in refined products.

Points to watch
- Further revisions to GDP growth forecasts in Asia and the OECD countries.
- The impact of high gasoline prices on US summer demand.
- Levels of non-OPEC oil supply during the Northern Hemisphere summer months.

Global Arab Network

Extracted from MONTHLY OIL REPORT CENTRE for GLOBAL ENERGY STUDIES (CGES)

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