With overall markets definitely not in the best of the shapes, the repercussions are getting evident in more than one way. A long-term pattern seems crystallizing — taking a concrete shape. While in the short to medium term, crude markets appear “stable,” the long-term scenario is far from evident. And that is a source of concern to industry.
The Paris-based International Energy Agency in a report released last week admits: “We might, just might, be in for some market stability for a while longer,” underlining that in 2011 oil prices may prove “not too hot, not too cold.”
Fundamentals seem to be playing a significant role in the current stabilization of the markets. It is evident that the increasing demand for oil in non-OECD developing countries has established a price floor. And in a similar manner, analysts strongly believe that the considerable existing spare capacity within the OPEC has also helped stabilize and soothe market sentiments, preventing it from any sudden flare-up.
The result is apparent: Crude oil has mostly been trading between $65 and $80 a barrel since May last year, the range major OPEC producers, including Saudi Arabia, have conceded to be a fair and acceptable price level to both consumers as well as producers.
However, ominous clouds gathering over the health of the global economy, of the impending double dip, W-shaped recession — a variable, much beyond the control of the market forces — seem keeping in check the medium-term prospects of the crude markets, too.
The US Federal Reserve is now offering a lower economic growth outlook for the country. The news coming out from Washington is not at all rosy — retail numbers are lower and mortgage applications are falling. Growth is not as fast as was initially thought — and this is having an impact.
The International Energy Agency is blunt: “North America will cease to act as an engine of demand growth in the OECD as the 2010 economic rebound, fueled by government spending and private sector restocking, fades.” And this carries a few ifs and buts too. The IEA concedes if the world returns to recession this year, “growth would be sharply lower, at 1.1 percent.”
Senior business managers are also looking at the next 12 month with rekindled concern. They see turbulent times for businesses ahead as the global economy is likely to deteriorate over the next 12 months, the BofA Merrill Lynch Survey of Fund Managers for July concluded. The findings of the survey suggested that the bear market sentiment is back and investors are moving out of the US and into emerging markets.
Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research says, “July’s survey echoes the sentiment that investors expressed during the recession in early 2009,” while Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research, underlined that “growth and profit expectations have double-dipped.”
And all this is impacting the near- to medium-term prospects of the crude markets, too. Growth in world oil consumption is slowing, underlines the OECD energy watchdog. “It will slow by a quarter next year, holding down prices but extending the period of relative stability the market has enjoyed for 14 months,” the IEA says.
The global need for oil will slow next year as governments across the world withdraw stimulus programs that accelerated the economic recovery, the IEA added.
Global oil demand is now projected to rise only by 1.3 million barrels per day (bpd) in 2011, or 1.6 percent, it said in its just released report. The agency predicts consumption growth of 2.1 percent for this year.
As per the IEA forecasts, consumption growth in China too would slow down to only 4.8 percent in 2011 as against 9.1 percent this year. The report expects total Chinese oil demand to rise by just 4.8 percent next year to 9.56 million barrels a day. China is the world’s second biggest oil consumer — a distant second to the US, which is forecast to burn 18.86 million barrels a day on average in 2011, down slightly from this year. Further, a continuing 0.5 percent reduction in oil use in industrialized countries, which are steadily improving car fuel efficiency and closing energy-intensive factories, will also push down global oil demand growth, the IEA underlined.
The report also pointed out that OPEC would continue to have 5.5 to 6 million barrels a day of back-up spare oil production capacity far into 2011 to offset any unexpected supply disruptions. And this would surely carry salutary effect on market sentiments, one can’t help underlining.
As the IEA appears toning down its next year demand forecasts to 1.3 million bpd for 2011, OPEC too expects only moderate oil demand growth next year.
The just released OPEC monthly oil market report projects the 2011 world oil demand to grow only by 1 million barrels a day. Worldwide crude oil consumption will increase by 1.05 million barrels a day, or 1.2 percent, next year to average 86.41 million barrels a day, OPEC said in its first assessment for 2011. OPEC too underlines that the demand growth is being driven at this moment by countries outside the OECD.
The two organizations seem close at least on this issue. Lingering doubts over the state of the global economy has at least done one service by bringing the two rather conflicting organizations closer to each other. And this in itself is no mean development indeed.
