Commodities | Jul 27 2009
By Chris Shaw
The global crude oil market is again beginning to tighten but there remains a significant overhang of supply given the weakness of demand on the back of the worldwide economic downturn.
What should prove to be a central factor in returning the market to a more balanced state in the view of Barclays Capital, thus lifting oil prices, is the pace of recovery in the Asian region, as in Asia there is a greater sensitivity of oil demand to the rate of GDP growth.
One positive according to Barclays is the region has a greater tendency than most other regions for economic growth rates to surprise on the upside compared to consensus forecasts. Recent data flows have been supportive of this theory, as using China for example the group notes GDP growth for the second quarter came in at 16.4% in quarter-on-quarter terms and 7.9% in year-on-year terms.
Factoring this into its model saw the group lift its GDP growth forecast for China for 2009 to 8.3% from 7.8% previously, while it notes the data as related to oil demand has been similarly positive. For the quarter Chinese demand increased by 5.2% in year-on-year terms, well up from the Mach quarter fall of 3.1%.
In terms of the impact on global oil demand the group estimates if Chinese demand had continued to fall at the same rate in the June quarter as it fell in the March quarter global demand in the period would have been around 600,000 barrels per day lower, which would not have helped in restoring the market to some kind of balance.
The improvement in Chinese demand doesn’t offset the weakness in OECD demand but as Barclays points out it does add a tightening factor to the supply cuts of recent months, which it also suggests have helped support oil prices. Others agree, as while Barclays now expects Chinese demand to increase by around 200,000 barrels per day this year, up from 180,000 barrels previously, the International Energy Agency has lifted its expectations from a decline of 70,000 barrels per day to an increase of 90,000.
On the back of the stronger Chinese growth data and generally stronger performance in Asia Barclays now expects global GDP growth of minus 1.2% this year and an increase of 3.6% in 2010, its forecasts increasing by 0.5% and 0.7% respectively since April.
Given this implies a stabilisation of the global economy the group suggests an oil price of less than US$60 per barrel looks to be something of an aberration, especially given the back-end of the forward pricing curve in the oil market is now close to US$95 per barrel.
According to Barclays the most likely outcome is for a soft landing for the oil price, especially as with OECD demand little changed it impies the overall market equation is one where market tightness is being determined by non-OECD demand improvement and declines in non-OPEC supply. Assuming its soft landing scenario plays out Barclays expects prices will move into a band above US$75 per barrel as the year progresses.