JEDDAH: The Middle East's economy is set for robust growth next year and strong economic activity is pushing oil demand up in the Middle East. According to the July report of the Organization of the Petroleum Exporting Countries (OPEC), Middle East oil demand growth is forecast to top 0.29 million barrels per day (mbpd) in the third quarter of the year.
Saudi Arabia's oil demand is set to grow by 0.18 mbpd in the second quarter to average 2.3 mbpd. The demand for gasoline and diesel consumption and also for industrial fuel are on the rise and are expected to continue to show gains for the rest of the year.
Transport, construction and petrochemical sectors will be the main drivers behind the strong Middle East oil demand next year.
The OPEC report expects world oil demand to grow by 0.9 mbpd in 2009, averaging 87.71 mbpd which is 0.1 mbpd lower than in the current year. Organization for Economic Cooperation and Development (OECD) and non-OECD oil demand growth of 1.2 mbpd will account for all of next year's demand growth.
"Although demand for oil in non-OECD countries should continue to be strong through 2009, demand in the OECD countries will remain the same or decline. It is obvious that we have reached a demand destruction point. The possibility of reaching a $100-$110 per barrel of oil is now more plausible, discounting any geo-political and supplier-related crises over the short-term than a month ago," John Sfakianakis, chief economist at SABB (The Saudi British Bank) said.
Higher energy costs and taxes, energy conservation, efficiency, alternative fuel, and other factors are the main reasons for the moderate growth of next year's oil demand.
World oil demand growth has been on a strong move for the past 20 years averaging 1.2 mbpd; however, new price structure and slower world economy are shifting oil demand toward weaker growth worldwide.
Declining OECD oil demand will affect total world oil demand which will make the 2009 the lowest since 2002. Oil demand in OECD Europe is expected to be almost flat.
The OECD Pacific will show a slight decline due to the slower oil demand in Japan.
Due to slowing US economy and relatively high retail prices, North America's oil demand is forecast to fall by 0.2 mbpd in 2009 to average 25 mbpd.
Meanwhile, Lehman Brothers said in its latest Energy Special Report that despite continued strength in China, one-off demand spikes in Japan from nuclear outages, and artificially increased European demand growth year-on-year due to abnormally warm winter in 2007, the world demand balance has weakened significantly.
Lehman Brothers forecasts annual oil demand for 2008 at 86.3 mbpd, a growth of 790k bpd from 2007.
The International Energy Agency (IEA) now forecasts global oil demand growth of 1.03 mbpd, compared with 2.11 mbpd at the beginning of the year. Because of deteriorating demand, the Lehman Brothers report said oil prices are approaching a tipping point, with prices expected to average $110 a barrel in the fourth quarter of this year, and further decline to a more supportable $90 a barrel in the first quarter of 2009.
Although agriculture and transport sectors are expected to be strong in India next year, the OPEC report said the partial removal of price subsidies and other governmental policies are forecast to result in lesser oil demand growth in 2009.
China, which is expected to contribute the most to world oil demand growth, is trying to achieve its preset goal to reduce energy intensity by 20 percent by 2010 through the implementation of various efficiency targets. China's move to increase retail fuel prices, however, will affect to a certain degree the consumption of transport fuel next year. China is also planning to increase the use of nuclear and hydropower plants, which will have more effect on the consumption of coal than oil.
Also, it is planning to curb automotive fuel consumption via new fuel price increase, usage of biofuel, and the building of more electric-powered railroads. These efforts might have a slightly negative impact on China's oil demand for 2009.
The demand for OPEC crude in 2008 is estimated to average 32 mbpd, a decline of 90,000 barrels a day over the previous year. In 2009, the demand for OPEC crude is expected to average 31.2 mbpd or 710,000 barrels a day lower than in the previous year.
Non-OPEC oil supply next year is expected to grow by 0.9 mbpd to reach 51 mbpd.
The decline in demand for OPEC crude combined with increasing OPEC capacity should further ease market conditions and likely help moderate prices. Whether the market will fully benefit from these softening fundamentals will depend on other factors such as geopolitical tensions, financial markets developments and downstream constraints, which have been the main drivers behind current crude oil price levels.
Despite the increase in OPEC production and higher exports, the OPEC reference basket reached a record high of $128.34 a barrel in June.