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Sunday, November 18, 2018

Downward revision of oil demand

Although market fundamentals are deteriorating, the market is staying strong. The (Paris-based) International Energy Agency (IEA) again revised its estimate for world oil demand downwards and it is now projected to increase by only 1.03 mbd in 2008. Oil demand in the U.S. is expected to be reduced by 0.44 mbd. The tanker market will have to rely on the increase in demand in China (+0.37 mbd), other Asia (+0.26 mbd), and the Middle East (+0.25 mbd).



Slower economic growth, high prices and 2006 baseline adjustments suggest that OECD oil demand will contract in 2008 for the third successive year.


April global oil supply fell by 0.4 mbd month-on-month to 86.8 mbd, influenced by lower North Sea outages, lower Former Soviet Union (FSU) output and weaker OPEC supplies. Although in the first quarter 2008 (1Q08) non-OPEC supply (ex-Angola and Ecuador) was unchanged from a year ago, OPEC supply stood 1.7 mbd higher. Non-OPEC output growth in 2008 is now seen to average 0.680 mbd, compared with 0.550 mbd in 2007.


The IEA says that February data were revised down significantly in all three regions. OECD demand thus fell by 2.2% year-on-year. As a result, 1Q08 has been lowered by roughly 0.570 mbd, thus weighing on the 2008 prognosis, now estimated at 48.8 mbd in 2008. That would signal the third consecutive annual decline in OECD demand since 2005. Prices have played a role, but whereas in 2006 and 2007 demand weakness was accentuated by mild weather and interfuel substitution, in 2008 it will be mostly due to stagnating growth in transportation fuels consumption, notably in North America – further evidence of the double squeeze of the ongoing economic slowdown and rising oil prices.


In fact, changing economic conditions in general, and the rise in prices in particular, are strongly correlated to forecasting revisions in the OECD. When the IEA first issued the 2008 prognosis in July 2007 (with May data), average oil prices were below USD 49/bbl, and major institutions were anticipating that U.S. GDP growth would be as high as +2.8% in 2008. Ten months later, prices have more than doubled, and the IMF's prediction for U.S. economic growth has been drastically cut to just 0.5%.


On the supply side it is interesting to note that oil production in Russia is now stagnating at around 10.1 mbd, but is increasing in other Former Soviet Union countries. April saw the start-up of the latest phase of the Azeri-Chirag-Guneshli (ACG) complex of offshore fields, with initial volumes coming from the 0.320 mbd Guneshli deep project. Although 1Q08 Azeri production has been trimmed by 0.050 mbd to 0.945 m/d, build-up at ACG should allow total Azeri production to average 1.07 mbd in 2008, a gain of 205 mbd versus 2007. May ACG volumes are expected to rebound after April maintenance, with flows through the Baku-Tbilisi-Ceyhan (BTC) pipeline likely to exceed 0.8 mbd. The BTC pipeline is likely to see a 20% capacity expansion to 1.2 mbd by end 2008, to accommodate not only rising ACG output, but also extra output from Kazakhstan's Tengiz field, which had originally been destined for transit via the long-delayed expansion of the CPC pipeline to Russia's port of Novorossiysk. Other expanding Azeri export options include the imminent reopening of the 0.1 mbd link between Baku and Supsa on Georgia's Black Sea coast and the new port nearby at Kulevi, which will be operated by Azeri state company Socar, designed to handle up to 0.2 mbd of crude.


Contact: Erik Ranheim