Commodities | May 18 2006
By Chris Shaw (Tokyo)
Perception is an important factor in markets as if a number of similar perceptions emerge at the same time it is easy for a trend to develop, while conversely if there are different perceptions there is uncertainty and so a greater chance for a surprising outcome.
An example of this is the oil market, where the perceptions of the International Energy Agency (IEA) and Barclays Capital are vastly different with respect to the level of Chinese demand specifically and as a result non-OECD demand.
Barclays suggests the level of non-OECD demand is a key for oil prices, as OECD demand was flat last year and is expected to show only a small increase this year. Predictions by the two bodies for Chinese demand are very different though, suggesting there is the potential for oil prices to surprise.
IEA figures suggest Chinese oil demand growth in the March quarter was around 160,000bopd, whereas Barclays puts the figure at around 600,000bopd. This represents a 9% year-on-year increase in demand, compared to the 2.5% increase suggested by the IEA figures.
Supporting Barclays view is official data showing refinery runs increased 7.1% year-on-year in April, which is indicative of stronger domestic demand. Barclays expects holesale prices will be increased in coming weeks, which would both lift refining margins and prove supportive for demand as it would help avoid production shortages.
As a result, Barclays anticipates Chinese demand will be stronger than the market expects this year, which translates into stronger non-OECD demand and so upside pressure on the oil price.
Adding to the pressure of stronger Chinese demand is the fact US stockpiles are declining by more than is normally the case at this time of year, which suggests the market remains quite tight.
Another bullish point for oil prices according to Barclays is the ongoing political issue of Iran and nuclear weapons, as it points out there remains the potential for Iranian production to be lost if, for example, sanctions are put in place.
While the IEA has suggested it could make up any shortfall in global production by supplying demand from its strategic reserves, Barclays suggests this is too optimistic a view given the current tightness in the market. It argues the market remains concerned about potential supply shocks, so while one shortfall may be made up the possibility further production may be lost thanks to natural disasters such as last year’s hurricanes or civil unrest as has been the case in Nigeria recently, which would see prices move higher.
In the case of the world losing Iran’s production for any length of time, Barclays suggests consumers should be prepared for not just a price reaction, but an extreme price reaction.