OPEC Expects Slower Demand in the Coming Quarters.
Crude oil prices fell for the third consecutive week from a peak of more than $83/b in early January to just above $71/b. Over the past week, prices have been particularly volatile following increased activities in the future markets. Many factors were behind these developments including a correction in equity markets from recent highs, a stronger dollar and concerns about the pace of the economic recovery and its possible negative impact on OECD demand.
More recently, heightened fiscal uncertainties in the Euro-zone and a shift in Chinese monetary policies and the effects this might have on that country"s growth prospects have further dampened sentiments.
The global recovery is proceeding apace, led by manufacturing, but the strength of the upturn in 2010 is still uncertain and regionally uneven. Stronger growth is expected in non-OECD in the range of 5-6%, spearheaded by Chinese growth of around 9%, while OECD is not likely to exceed the 2% mark. Indeed, according to our latest forecast, real GDP in the US in 2010 will only be 0.4% above the pre-crisis level, in sharp contrast to a 29% increase in China. Moreover, in the major OECD countries, the recovery is far from self-sustaining and remains largely dependent on continued government support. Moreover, uncertainties related to the timing and coordination of exit strategies and the ongoing debate on regulatory financial reform may add a further layer of risk to the other challenges faced by advanced economies. The rapid deterioration in government finances is a major constraint on maintaining the much-needed fiscal support to labour markets and other sectors of the economy in many OECD countries. Within the Euro-zone, highly indebted members have already led to a hike in credit default premia and damaged the credibility of the single currency, causing it to lose ground against the dollar. In contrast, brisk growth in emerging countries is creating early signs of overheating, implying a faster exit from expansionary policies.More recently, concerns of overheating have focused on
China"s very rapid expansion of lending and capital inflows as well as rising property values. Consequently, the Chinese government took steps to slow down the pace of bank lending and lower the target for credit expansion, fuelling expectations of an impending interest rate increase, which could slow economic growth further down the line. Such expectations translated into a correction in equity values not only in China but also across the globe. At this time, fears of a sharp slowdown in China appear premature; however, the strong market reaction is a reminder of the rising importance of the Chinese economy in the global context. In 2010, China is expected not only to be a major motor of regional and global growth but is seen to supplant Japan as the second largest economy.
Uncertainty about the pace of the US economic recovery is creating some downward risk on the country"s oil demand this year. Cold weather managed to increase demand for heating oil and fuel oil, but declining demand for diesel and gasoline resulted in negative growth in January. The 1% or around 180 tb/d forecast growth for US oil demand for the whole year may not materialise. Given several obstacles demand growth could be as little as 100 tb/d for the total year (see Graph 2). The main risk remains the recovery path of the US economy which in turn is dependent on the degree of government fiscal and monetary support and its success in lowering the unemployment rate, a main determinant of consumer sentiment and private consumption.
Last year, China"s strong economic growth was based on the huge stimulus package, which contributed to a moderate rise in oil demand. In 2010, oil demand is forecast to grow by 4.5%, or 0.37 mb/d. Nevertheless, the government is keen to curb the nation energy use, an aim incorporated in its current five year plan. However, there is some uncertainty about oil demand growth. Slower-than-expected growth in the global economy could impact China"s exports and industrial production, dampening the need for oil. Internal measures to slow down the economy may also affect oil demand. On the other hand, positive signals ? such as projected strong growth in new car sales in
China ? appear supportive for oil demand growth this year.
In light of the significant contribution of the US and China to economic growth and oil consumption, the economic and demand uncertainties in these countries will continue to have an important impact on both the world economy and the oil market. Therefore, ongoing developments should be monitored closely in the months ahead.