Global oil demand set to moderate in 2011

DANIEL KAYE | APRIL 2011 | SOURCE: Arab Times

Oil prices took yet another leg up in early April. The price of Kuwait Export Crude (KEC) jumped to USD 117 per barrel (pb) on April 8th, up from USD 108 at the end of last month and a similar average for March as a whole.

Other major benchmark crude prices also rose. The price of Brent crude – the main European blend – breached the $120 mark for the first time since August 2008.

Global oil demand set to moderate in 2011

The price of West Texas Intermediate (WTI) rose USD 8 from late March to USD 112, but continues to trade at a discount to other crudes because of oversupply issues at its US delivery point.

Two key factors are responsible for the latest price rise. Firstly, fierce fighting between government and opposition forces has strengthened perceptions that Libyan oil will be shut-in for an extended period.

Although a rebel-controlled oil company was set to make its first oil export shipment of some 1 million barrels in early April, the military superiority of the government forces has led some analysts to speculate about the possible targeting of the country’s oil infrastructure to choke-off rebel funding. African output was also disrupted by a strike by oil workers in Gabon, which normally produces some 240,000 barrels per day (bpd).

The second key factor has been the growing expectation – subsequently realized on April 7th – of a rise in official interest rates in the Euro area.

Widening the spread between Euro and US rates tends to weaken the US dollar, which typically boosts the price of dollar-denominated commodities. Something like this occurred in mid-2008, when a surprise hike in Euroland interest rates generated a USD 16 pb jump in crude prices in the space of just two days.

Oil demand outlook

After last year’s huge rise of 2.9 million bpd (3.4%) – the second largest increase in 25 years - global oil demand growth is set to moderate in 2011. This is largely the result of reduced economic growth prospects as both monetary and fiscal policy are tightened.

But in addition, high oil prices are themselves expected to provide a drag on demand, particularly in the slow-growth OECD region. The disaster in Japan is expected to reduce oil demand there in the very short-term. But this may be partially offset for 2011 as a whole by stronger oil demand as lost nuclear power generation capacity is replaced with conventional facilities. Japan accounts for around 5% of global oil demand.

The Centre for Global Energy Studies (CGES) and the International Energy Agency (IEA) both expect oil demand growth of 1.4 mbpd (1.6%) in 2011, bsed on flat-to-falling demand in the OECD region and growth of 3.3 to 3.7%% in non-OECD countries.

Within this overall figure, however, growth is expected to slow considerably in the second half of the year as the impact of policy tightening begins to feed through.

Related article: Saudi Arabia's target oil price in 2011

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