RIYADH, Oct 29: Crude prices are getting back to some senses. To some the sustained rally in the crude markets has finally begun impacting the consumption pattern in the industrialized countries. Indeed if the prices, holding at the moment in the vicinity of $60 a barrel and the last week’s US stock data, are any indication, it seems the market dynamics are finally in for a change — in the short term at least.
The softening of the crude markets was further aided by the fact that Hurricane Wilma did not threaten and rather spared the US oil and natural gas facilities in the Gulf of Mexico. The global industrial machinery thus appears well oiled for the time being.
The US Department of Energy report highlighting that the crude stocks in the US rose by 5.6 million barrels in the week to October 14, also gave credence to the emerging picture. The figure was almost three times higher than analysts’ forecasts of a 2.0-million-barrel increase.
Gasoline reserves meanwhile also gained 2.77 million barrels, compared with market predictions of a 1.2-million-barrel decrease.
Inventories have thus been built and demand for products in the United States has in the meantime fallen. All these factors are thus seen sending bearish signals to the market in the short term, it now appears.
Firm oil prices for a sustained period of time have also apparently contributed to the easing of the global crude markets -– denting the consumption growth pattern -– at least in the near term.
This lowering of demand is also starting to have stabilizing impact on the markets. Crude prices are apparently in for ‘some correction.’ After crossing the $70 a barrel peak late August, the prices have in the meantime, dropped by almost $10 a barrel — currently hovering around $60. The global thirst for crude seems to be weakening, bringing some sense to the markets, as some prefer to call it.
The emerging scenario has forced both the Opec and the International Energy Agency (IEA) to slash its forecast for oil demand growth this year. The Opec report, however, also clarified that it saw no signs – yet - of the much trumpeted ‘demand destruction’ owing to higher gasoline prices in the US to continue. It saw no compelling evidence of any dramatic drop in consumption ‘over the longer term.’
However, in the near to medium term, the outlook as painted by the Opec appeared to be somewhat sombre. Highlighting the impact in near-term demand of the surging crude prices, Opec cut down its demand growth forecast for the last quarter of the year from 1.2 million barrels a day to just 740,000 barrels per day. Opec also trimmed demand growth next year to 1.47 million b/d only. However, it also underlined that despite cut is demand growth forecast, there was insufficient evidence to support the premises that the decline would continue in the foreseeable future.
The outlooks issued last week by the International Energy Agency and the US EIA also highlighted cut in the pace of rising consumption this year, but projected still muscular demand in 2006 too.
The Paris based IEA in its monthly report in fact projected a rebound in global demand next year after a dip in the Q4 2005. It trimmed 2005 global oil demand growth by 90,000 bpd to 1.26 million bpd. However, the IEA projected a different scenario the next year. It expects the demand growth to rebound to 1.75 million bpd next year following the ‘largely temporary impact’ from the hurricanes and a recovery in Chinese demand -– causing serious damage to the demand destruction theory.
In the meantime, the London based Centre for Global Energy Studies (CGES) in its monthly oil report released on October 24 has somewhat differed from the above conclusions. While expressing concerns about the strength of oil demand growth in 2006, it emphasised that these concerns have begun to overtake worries about oil production capacity in assessments of the oil market next year.
The CGES while concurring with the above mentioned Opec and IEA reports underlines that the oil demand growth in the remaining part of 2005 looks set to be soft — little more than a third of the growth seen in 2004 — as high oil prices have been felt by final consumers this year in a way that they were not last year.
The CGES, however, expects the global oil demand growth to remain weak in 2006 too. However, it cautions that lower demand growth would still outstrip non-Opec supply growth of less than one million bpd. Opec should have little difficulty in keeping oil prices above $50 a barrel, it says. However, it underlines that unless demand growth rebounds, the oil cartel may have to cut output to do so -– indeed a reversal of fortunes in some cases.
Another factor getting into the crude price equation is the strengthening dollar that has already hit a two-year high against the yen last week.
There seems to be some relationship between the dollar’s parity with major currencies and the global crude price. In recent years while dollar has remained weak in strength, the crude prices kept surging. However, once the dollar starts to gain strength, often crude prices witness a downward slide. The beneficiary in both the situation has been the globe’s dominant economy – the US. Was it mere coincidence? And if so, what a fortunate one indeed!