And higher prices could not be solely held responsible for the softening of demand.
Last Thursday, the Paris-based International Energy Agency, the OECD energy watchdog, announced that it was lowering its global oil demand growth forecast for the year by 190,000 barrels per day, from its earlier projections.
The IEA insisted that the emerging demand destruction was due to persistent high prices and lower growth projections for developed economies.
Preliminary March data showed a marked slowdown in global oil demand, the agency said, although in the same breath, the IEA underlined that the data could be distorted by the devastating earthquake in Japan and the Easter holiday period.
“Nonetheless $4 gallon gasoline is likely to yield an anaemic US driving season,” IEA projected.
The IEA has been pointing to the softening trends in crude consumption for a couple of months now.
In its Monthly Oil Report last month, the IEA had said, “Economic impacts from high prices are never instantaneous, and often take months to materialize, but preliminary data for early?2011 already show signs of oil demand slowdown.”
Interestingly, the IEA report also focused on an interesting point, saying, unfortunately the surest remedy for high (crude) prices may ultimately prove to be high prices themselves.
And indeed none can deny that. And although some pundits keep stressing on the inelasticity of crude demand, recent happenings do point to the fact that crude demand is price elastic too.
The IEA definitely has a point.
In 2008 too, when prices peaked at $147 a barrel, it was soon followed by significant drop in global consumption. This caused the bubble then to burst and prices soon floored at low 30s. And the horrific transition was complete over just few months.
This is volatility of the highest order — bringing upheaval to most economies. This time too, the same phenomenon seems working – bringing back the markets to senses.
The Short Term Energy Outlook released last Tuesday by the US Energy Information Agency (EIA) also points to falling demand.
The EIA now projects that total world oil consumption will grow by only 1.4 million barrels per day (bpd) in 2011— some 0.1 million bpd lower than projected only last month.
The graph is definitely slanting down.
And apparently it was in this context that Majed Al-Moneef, the Saudi governor at the OPEC, told the press in Brussels last week, “our view has been that a sustainable price over the long-run is $70-80 per barrel.”
He was indeed correct. For markets begin to change patterns, if prices continue to pass the tangent too often and by a considerable margin. And this is hazardous for both — the producers as well as consumers.
And the softening markets were also evident from the fact that the output of the OPEC 12, including Iraq, went down to an average of 28.84 million barrels per day (bpd) in April, from 29.17 million in March, according to a Platts survey. In fact the monthly decline in OPEC crude output was the third in row. And this was despite the Libyan outage and its psychological impact on the markets.
Why this softening of demands? Although the IEA points out at the higher prices as the culprit, many in the industry look at the prevalent higher oil prices only as one of the many culprits and not the only.
Other factors are also definitely in play.
Markets seem to be getting the cue that China, often accused in recent times for taking the global consumption to still higher levels, is seriously manoeuvring to cool down its overheating economy. And this could have stark implications for crude markets — one can’t help underlining.
China’s inflation is still well above Beijing’s target and this has sparked fresh concerns that China will invoke further cooling measures.
This could slow down growth in the world’s second-largest economy and affect demand for oil, most analysts say.
In the meantime, another major development is also hanging as a sword on the crude markets.
The US Federal Reserve program of buying Treasury bonds, commonly known as quantitative easing (QE), has been instrumental in keeping the US economy going at a fairly good pace.
It has helped boost the money supply and weaken the US dollar, making commodities such as oil cheaper for investors with other currencies.
However, the second round of the bond buying program is scheduled to end next month. And traders are currently struggling to gauge the impact on crude markets.
“The major policy that has shaped oil prices is winding down,” Cameron Hanover said in a report.
“As long as the Fed does not come up with a third round of quantitative easing, the major reason for oil price strength will be gone.”
“The world economy is clearly slowing,” said Capital Economics in a report.
“Rather than being in the early stages of a super-cycle, the prices of many industrial and agricultural commodities seem more likely to be forming bubbles which are set to burst.”
In the meantime, the IEA also concedes that besides the persistent high prices, weaker IMF GDP projections for advanced economies has also helped in trimming down demand projections for the months ahead.
Renewed concerns about the health of the global economy, in view of the persistent, shaky economic statistics from the US, China and Germany continue to have a bearing on the oil market outlook.
And it is in this backdrop that OPEC continues to insist that despite the Libyan outage, oil supplies are adequate. In its just released monthly report, OPEC said it expected the world oil demand to grow by 1.4 million barrels per day (bpd) this year, unchanged from last month, and in line with a reduced estimate on Tuesday from the US Energy Information Administration.
In the shorter run, the fundamentals continue to appear weak.
Softening of market prices hence cannot be ruled out at this stage.
