Lower oil demand for the last couple of months has led Saudi Arabia to reduce its crude output. In April, Saudi Arabia produced 9.1 million bpd as compared to almost 9.5 million bpd during Q106. With lower customer demand, the Saudi output, as per OPEC estimates, fell still further to 9.05 million bpd in May. OPEC officials are saying customers were now asking less crude volumes. “Demand for Saudi oil has been going down for two reasons. There are high stock levels and some companies are even saying they have no place to store oil,” a senior OPEC source commenting on the situation said.
Saudi Petroleum Minister Ali Al-Naimi was quoted as saying that with various refineries being shut down for repairs and maintenance and not having the capacity to refine all the oil coming their way, other members of the Organization of Petroleum Exporting Countries were also having a difficult time finding buyers for all of their oil on offer. Demand has gone down not only for heavy but light oil as well, the Saudi minister added, indicating that markets have reached a somewhat saturation point.
This drop in Saudi output was not intended to firm up the markets, as some including the London-based Center for Global Energy Studies suggested in its monthly oil report for June. Naimi argued that the Kingdom was not easing up on production because of concerns about buildup of inventories in the United States or other importing countries, suggesting that oil producers would be ready to sell all the oil they could, and that is required, under the present market environment.
High prices in the meantime, are starting to weigh on consumption, especially in the industrialized world - denting, in the process, the bullish demand outlook. International Energy Agency estimates that the global oil demand this year would be lower than previously expected. The agency reduced its global oil demand growth forecast for the year to 1.24 million barrels a day from 1.25 million bpd a day. This is down approximately 30 percent from its growth estimate in January this year. Demand from advanced industrialized countries was expected to have declined in the second quarter of the year. “In spite of recent resilience in the US demand, consumption growth remains week in other major economies,” commented the IEA in its monthly report. This would be the third quarterly decline in a row of demand form the OECD area from figures 12 months earlier.
The CGES, founded by former Saudi Oil Minister Sheikh Ahmed Zaki Yamani also has trimmed its forecast of global oil demand growth in 2006 to 1m bpd, or just 1.2%, while incremental non-OPEC production remains roughly the same at just under 1m bpd for the year.
Another factor weighing in on the crude markets, was the increasing inventory levels in the US and Asia which were reported to be at a 20-year high. Could this all be termed as signals of a weakening market.
No, say most of the analysts. Many argue that though the demand growth within the OECD may be softening, yet the developing world, with China as the star player, continues to weigh heavily on the markets. According to the IEA the Chinese demand for refinery production plus net imports of products “grew by an unexpectedly robust 9.6 percent year-on-year in April this year.”
Meanwhile, the CGES in its Monthly Oil Report (MOR) released on June 19 expected the (demand weakening) trend to be only a temporary phenomenon. In the report, the CGES says, “during 1Q06, when Atlantic Basin refineries were in turnaround, oil went east as Asia re-stocked. This year’s refinery turnarounds in the Atlantic Basin have extended well into 2Q06, overlapping with Asian turnarounds and removing more than 2m bpd of refinery demand, thus allowing crude stocks to swell.”
The CGES therefore felt that as Atlantic Basin and Asian refineries come out of turnaround, global demand for crude oil would pick up again. “With non-OPEC supply growth underperforming against expectations and OPEC currently unable to supply much more than 30m bpd of the type of crude the world wants, oil prices are likely to drift back up in 3Q06,” the CGES June MOR argued strongly.
Another factor to be considered is the approaching hurricane season. An average of 0.6m bpd of production was lost in the Gulf of Mexico due to hurricanes last time and some of this output was still not back on stream. In case the frequency and severity of hurricanes of the last year is repeated in 2006, it may have severe implications for the somewhat stretched demand-supply balance.
In a world of record refining margins, high prices and little spare production capacity, the smallest imbalances can result in large swings in crude prices. Oil markets could stay volatile for some time, despite the apparent weakening of the global markets, one could safely underline at this stage.
