Commodities | Aug 28 2012
– Global oil market appears to be tightening
– Release of US strategic stocks looking more likely
– Few obvious dampeners for oil prices at present
– China remains a major driver of global oil and gasoline markets
By Chris Shaw
A large upswing in demand of two million barrels of oil per day, along with falls in both OPEC and non-OPEC supply, have seen the global oil market tighten significantly in the September quarter relative to the June quarter.
Barclays Capital expects the current strength on the demand side will continue, forecasting record demand levels in the September quarter. This should have the impact of driving a global draw in oil inventories of as much as 1.3 million barrels per day.
As an example of how the market has been tightening, Barclays points out US oil inventories have fallen by an average of 460,000 barrels per day over the past eight weeks relative to normal seasonal patterns.
For Barclays, this draw on inventories and the fact gasoline prices are near trigger levels has increased the likelihood the US is considering a release of strategic stocks. Unless such a release is unexpectedly large, Barclays sees such a move as doing little more than dampening prices.
As the oil market has tightened prices have moved higher and Barclays suggests there are now only three potential dampeners for prices that could gain any significant traction in the market. The first is macro economic concerns, as sovereign debt issues in particular have remained an issue for some time and act to weaken oil demand.
The second is if optimism over the outlook for shale oil and the potential for this increase in supply to push down oil prices again emerges. For Barclays, this is unlikely in the current environment as shale oil continues to look like expensive oil brought on by higher prices rather than cheap oil that can bring down prices.
The final uncertainty is the US Strategic Petroleum Reserve. Barclays suggests a release is likely being considered given recent increases in gasoline prices in the US market. While the exact trigger for such a release remains unclear, a bigger issue for Barclays is how would the market react to any such release.
With the oil market feeling short of crude at present, Barclays suggests any release may do little more than create a plateau for prices rather than drive the oil price down sharply. One reason is strong year-on-year growth in US gasoline demand.
When this is added to the recent swing in Saudi demand to significantly higher levels it supports the Barclays' view global oil demand in August will be above the level recorded at the time of the usual seasonal high in January.
For Deutsche Bank, the question of whether this strength in oil demand can be sustained rests largely with China, as this market accounts for around 35% of global oil demand growth this year and as much as 50% in 2013. This means any downgrades to Chinese economic growth expectations adds some downside risk to oil demand levels.
At present, Deutsche is forecasting economic growth for China of 7.7% this year and 8.2% in 2013, down from previous forecasts of 8.3% and 8.6% respectively. Weaker economic growth translates to weaker oil demand growth, Deutsche expecting oil demand will increase by 3% this year and 4.5% in 2013. This compares to a five-year average growth rate of around 7%.
At the same time Deutsche suggests growing expectations for the potential of additional quantitative easing, along with ongoing oil supply constraints, offers some upside risk to the oil price. Physical oil markets continue to deal with both realised disruptions and the fear of fresh disruptions stemming from ongoing tensions in the Middle East.
This means aggregate crude oil production in eight key producing regions/countries is down by an average of 630,000 barrels per day over the first seven months of this year on Deutsche's numbers.
A further area of concern is low gasoline inventories, as with refinery maintenance season still ahead there is little scope in Deutsche's view for any meaningful build in surplus prior to the northern hemisphere winter.
Looking more closely at China, JP Morgan notes cash-for-clunker type subsidies, tax rebates and registration quotas all act to drive wide fluctuations in vehicle sales. Passenger vehicle sales for the Chinese market are estimated to have increased significantly in 2009 relative to 2008.
For JP Morgan, this increase in sales would have boosted Chinese gasoline demand by around 152,000 barrels per day in 2009 in year-on-year terms. Given the potential for this to impact on market stresses and prices, such an increase is substantial in JP Morgan's view.
Chinese passenger vehicle sales are estimated to be at an average of around 15 million per year at present. JP Morgan suggests if sales remain at current levels Chinese gasoline demand could rise by 11% year-on-year over the rest of this year and by a further 12% in 2013.
On JP Morgan's numbers a one million unit change in annual new passenger vehicle sales translates to a first year impact of around 10,000 barrels per day for Chinese gasoline demand. Given since 2008 global gasoline demand has grown by just 140,000 barrels per day in year-on-year terms, it is clear China will continue to have a significant impact on global gasoline demand growth.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.