Oil demand is falling. In the US it fell by 4 percent in July from a year earlier, to 18.555 million barrels a day — the lowest level for the month since 1996; revised government data released Thursday show.
US gasoline demand for the month too fell 3.7 percent to only 8.96 million barrels a day, the lowest level since 2000, despite the fact that July is regarded the peak month of the summer driving season. This is the fourth straight drop in year-on-year total oil demand after 14 consecutive year-on-year increases beginning in February 2010.
The signs were ominous for the crude markets to ignore. Markets continued reacting to the worsening scenario. Oil futures declined further this Friday, ending the month nearly 10 percent lower and down 16 percent for the quarter, as hopes dimmed that oil demand would pick up. Fears of slow growth and heightened concerns about the euro zone debt crisis, kept a tight the crude markets on a leash.
“The underlying message is that the economy will remain weak in the long term,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “In the short term the market is going to react on every headline out of Europe on the debt crisis and every bit of economic data here in the US.”
And in the meantime, supplies remain sufficient. A rise in production at the Organization of the Petroleum Exporting Countries (OPEC) — partly due to the increasing supplies from Libya, is also adding pressure on the global balance. Supplies are outstripping demand — for the time being at least. OPEC member countries reportedly boosted their oil production in September to 30.25 million barrels a day, its highest level for nearly three years, according to Commerzbank analysts. “While supply is rising, the signals of demand weakening are increasing,” they noted.
A Bloomberg News survey also confirmed that led by Iraq, the OPEC output in September rose to the highest level since November 2008. Iraqi production rose 90,000 barrels, or 3.4 percent, to 2.77 million a day this month, the highest since October 2001. As per the survey OPEC was currently producing 2.44 million barrels above their target.
And in the midst of all this, the Libyan oil sector too is getting back on track, slowly and surely. There were rumors on the trading floors last Friday that ConocoPhillips became the first US oil major to buy Libyan oil, since the start of the civil war in February this year. The company loaded 381,000 barrels of Sarir and Mesla crude onto the tanker, Hellas Warrior, set for delivery to France’s Mediterranean port of Fos-Lavera.
Markets are under pressure. Sentiments are not too rosy. And the big question on the horizon remains; are the producers too concerned about the falling prices? Are they going to react? Would they lower the output to tighten the markets and spur prices?
It is definitely not easy — and indeed justifiable — for this correspondent with no inside info at hand — to answer the billion-dollar question. Yet one could definitely guesstimate.
Oil producers do not appear to be in any panic — as yet. Many among them — especially the doves do very well realize that high prices are ultimately going to boomerang. It could have a long-term impact on the global demand scenario. And they are sensible enough not to hurt their long terms prospects.
Saudi Arabia and its Gulf allies hence do not appear ready yet to intervene and prop up prices by withdrawing supplies any time soon. They are not worried — as yet.
“I don’t see Gulf countries cutting back too much from their production. This will be more of a gradual process and I really don’t think Libya will be back in the timeframe that was given,” a Gulf official was quoted as saying by Reuters.
Despite increased public expenditure, Saudi finances too remain strong. Riyadh is on course to earn nearly $300 billion in oil revenue this year, $50 billion more than planned and has $550 billion in foreign reserves, Prince Turki Al-Faisal said in a recent speech.
“They’re sitting pretty at the moment,” said oil consultant Bill Farren-Price of Petroleum Policy Intelligence of the Gulf Arab group. “Anything above $90 is fine. They want to support the (global) economy.”
“Given the Kingdom’s interests in satisfying fiscal requirements and maximizing over time the revenues from its massive oil reserves, we think a price range of between $70 and $90 per barrel is currently ‘sweet spot’ for Saudi Arabia,” said Jadwa Investment, in a report on Saudi finances.
Other Gulf Arab states also appear to be following the same line. Only last week, a senior Gulf official told Reuters that producers are unlikely to reduce supplies to try to stem a decline in oil prices unless crude falls below $90 a barrel for a sustained period.
Some others, when contacted, though did not specify an ideal price range yet said they would maintain high output and could live with a further decline in prices (despite the increase in public expenditure).
“The price has come down but it is still above $100,” said an official from one Gulf Arab OPEC member. “$90 is still high.”
And though in the short term, OPEC may not be too concerned, yet most realize that demand security is crucial for carrying out investments in the sector, so crucially important to meet the future requirements of the market.
While speaking in Dubai a couple of weeks back, OPEC Secretary-General El-Badri, too underlined the need to bolster global economy, so as to boost demand and attract investments in the sector.
“It’s (the state of the global economy) really hampering the demand for oil,” he said. “That stimulus package is not really working. Something must be done to introduce new manufacturing, new activities (so the Wes) can solve its unemployment.”
OPEC members plan to invest $312 billion over the next five years to bring 21 million bpd to the market, El-Badri said, and they needed to be assured that those barrels would be required.
“The consequence is this $312 billion is shooting into the dark. Maybe that new production will never go to the market,” said El-Badri. “Thirty million (barrels) is not like this bottle of water, you just open and pour it. A lot must happen to bring oil to the market. You have to spend a lot of money.”
Indeed who knows it better than El-Badri. And yes despite the battering, tightening of supplies does not appear on the horizon at the moment.