Commodities | Sep 10 2009
By Andrew Nelson
Crude oil prices were pretty flat in August, fluctuating around the US$70 per barrel mark, and while the month did see an 11% increase, this was only because it lifted from what were fairly week prices in early July. But despite the seeming increase, real prices are still around 50% below their mid-2008 peak, with economists at National Australia Bank (NAB) predicting they’ll be there for a while yet.
Looking at last month, prices started to drift lower in the middle of the month as buyers became increasingly concerned about the possibility of financial institutions suffering further credit losses. This in turn cast a shadow over what had been increasing optimism for the global economic outlook.
It is this outlook that is the main factor of support for the current demand outlook, as real demand is still reasonably low, while production is holding steady.
In its July Oil Market Report, the International Energy Agency (IEA) did, however, lift its 2009 and 2010 global oil demand forecasts, citing an expectation of increasing consumption in developing Asia. The 2009 forecast now stands at 83.9mb/d, which is still well below 2008 levels, with demand forecast to rise to only 85.3mb/d in 2010.
Chinese crude oil import data, while a fairly volatile read, continue to show that demand levels are increasing compared to earlier this year. However, NAB cautions not to pin too many hopes on this trend, as it sees the buying as being mainly due to strategic stockpiling, with the country in the process of constructing eight storage sites with an aggregate capacity of a further 170mb as part of its strategic oil reserve plans.
That said, the IEA has noted an increase in actual refinery crude throughput, with Chinese gasoline consumption up by 10.2% for the year to June. NAB believes this strong gasoline demand is likely due to the government’s reduction in the motor vehicles sales tax, which has seen an increase in cars owned. However, the team also notes a surprising slump in fuel oil demand, which it finds curious given the solid industrial production growth in China so far this year.
Another seemingly positive sign is that global crude stocks are declining, or at least so show the June data cited by NAB. However, the team notes that is more to do with higher throughput at refineries rather than any real increase in consumption, with distillate stocks increasing in both in North America and Europe.
US Energy Information Administration (EIA) weekly data also highlights that the draw down in crude stocks in the US is due to higher refining activities, not demand, noting that gasoline inventories are tracking around their historical average, while US distillates stocks are at their highest level on record. However, the latter fact can at least be partly explained by a stockpiling leading into the higher demand winter season. But it still doesn’t paint a pretty stockpile picture.
NAB notes that US demand for distillates has also been limited because of the recent slump in industrial production growth and freight movement, with the latter assessment borne out by the recent decline in the Baltic Dry Index. As such, the team thinks that the speed at which the distillate oversupply will be worked off depends very much on the outlook for production.
It’s true that over the last few months, measures of US industrial output have begun to rise, but further out, the NAB group economics team is forecasting US industrial production growth will remain relatively modest. The team cites the already significant spare global production capacity and continued business deleveraging, which will likely restrain private sector investment. This, says NAB, will likely to keep demand for distillates relatively weak for some time to come
There is little in positive news from the supply side as well, with the IEA’s most recent Oil Market Report estimating that global oil supply rose by 570 kb/d to 85.1mb/d in July. This increase was despite a fall in oil production from OPEC, with higher production from Russia and the US boosting non-OPEC oil production. This caused the IEA to actually increase its non-OPEC supply expectations for 2009 by 160kb/d. As you can imagine, this increase in supply puts even more pressure on the demand side.
All this leads NAB to predict that at least in the short term, oil prices will remain range bound in this US$70/b-US$75/b area, with the price being driven by macroeconomic indicators more than by underlying market supply/demand fundamentals.
The signs to look for, says NAB, are sustained draw-downs in stocks of oil products, which will be a true sign that global consumption and industrial production are beginning to truly pick up. Hopefully, this will be followed by a bit more supply discipline by OPEC, which would exert some real upward price pressure.
But given the substantial OPEC spare capacity at present, NAB thinks that any rise in oil prices, even after the macro picture improves, will likely unfold only gradually.