Oil demand growth is slowing but global supply remains tight as non-Opec
supply falls short of expectations. Opec still needs to maintain output in order to
rebuild industry stocks.
The oil market is finely balanced. Surging prices have damaged the global economy, tipping OECD countries close to recession and slowing developing world oil demand growth. But supply remains tight with no sign yet of the upturn in non-Opec output predicted by Opec and the IEA. Although global inventories rose last quarter — ending the long stockdraw that helped to fuel the relentless rise in prices — the build falls short of seasonal norms, leaving the industry dependent on Opec to meet any unexpected supply shortfall.
Oil demand is down sharply in the OECD. Inland deliveries in the US fell by nearly 800,000 b/d in the first seven months compared with the same period a year earlier. But non-OECD oil demand is more robust, growing by 1.7mn b/d in the first half of this year, according to Argus estimates. China and India account for 700,000 b/d, with Latin America providing another 300,000 b/d and the Mideast Gulf up to 400,000 b/d.
Although the downturn in the OECD will inevitably affect developing economies, tempering their recent rapid growth rates, the impact on oil demand is less clear. Widespread problems with electricity supply are supporting strong growth in non-OECD demand as generators turn to oil to solve their difficulties. Shortfalls in natural gas supply in Asia and Latin America are boosting demand for diesel to burn in power stations and to drive small generators. And more fuel oil is being used in the Mideast Gulf to meet surging electricity demand.
Forecasters hold widely-different views about the global supply and demand balance in the second half of this year. Despite fears about the global economy and evidence of demand destruction in OECD countries, neither Opec nor the IEA have trimmed their forecasts for oil demand growth in 2008. Demand is still expected to rise by 1mn b/d by Opec and by 800,000 b/d by the IEA, and both predict stronger growth in the third and fourth quarters. In contrast, Argus now expects slower oil demand growth in the second half of this year, reducing the annual increase to 700,000 b/d.
Opec and the IEA still predict that a late surge in non-Opec production will add just over 1mn b/d to supply in the second half of this year. But Argus is more pessimistic, expecting an increase of 500,000 b/d. Non-Opec supplies got off to a bad start this year with total output down by 200,000 b/d in the first two quarters compared with the same period a year earlier. And third-quarter non-Opec production is falling short of expectations following sabotage of the BTC pipeline and Russia’s invasion of Georgia.
Opec seems uncertain how to respond to falling prices. Like Argus, the organisation’s forecast indicates a small excess of supply over demand in the second half of this year if Opec crude output remains at July levels. If maintained, this would help to rebuild inventories ahead of the winter after last year’s massive stockdraw. But shipping data already show a downturn in Mideast Gulf sailings after this summer’s surge, suggesting that refiners are already responding to narrower discounts for Saudi heavy crude by cutting liftings. With non-Opec supply still falling short of expectations, industry stocks low and non-OECD oil demand inflated by problems in the power sector, it would be a mistake for Opec to tighten supply any further.
