Questions raised over 'demand pessimism'

Paula Dittrick
Senior Staff Writer

After the International Energy Agency and Organization of Petroleum Exporting Countries lowered their forecasts for annual average oil demand this year, analyst Paul Horsnell of Barclays Capital Inc. in London questioned the accuracy of what he called "demand pessimism." Actual Chinese demand, a vital and rapidly growing factor in the global total, will prove stronger than estimates suggest, he said in a July 20 research note.

"On the demand side, the past week has seen the resumption of the occasional wailing and gnashing of teeth that occasionally surfaces after an IEA report," Horsnell said.

He said Chinese oil data are misleading.

"We would put the normal margin of error on the data at 5% at the very least, and probably more," Horsnell said. "Using that data, the implied level of Chinese demand was fairly flat in the second quarter, resulting in the 300,000 b/d reduction in the IEA estimate."

But he believes China oil demand growth is climbing because China's gross domestic production growth, motor vehicle sales, and retail sales of petroleum all show robust gains this year.

Revised outlooks
The IEA on July 13 revised its projection of world oil demand growth downward by 200,000 b/d to 1.58 million b/d in 2005, citing a weaker outlook for China and the US.

"China's price restrictions on transport fuels and power are making it uneconomic for domestic refiners and utilities to maximize output, therefore inhibiting demand. Any liberalization of either market has the potential to increase domestic oil demand," the IEA said in its Oil Market Report. "However, so far there is no sign of this happening, and anecdotal indications suggest a weak start to apparent Chinese demand in the third quarter."

The IEA predicted accelerating non-OPEC supply, which in 2006 is expected to average 52.4 million b/d vs. 51 million b/d in 2005.

The Organization of Petroleum Exporting Countries, meanwhile, lowered its 2005 world oil demand estimate by 150,000 b/d in its Monthly Oil Market Report on July 18.

The absolute level of demand was reduced for the second, third, and fourth quarters by 300,000 b/d in each quarter, OPEC said.

OPEC blamed a "slowdown in economic activity in some regions and preliminary demand figures pointing to significantly lower consumption in the first half of the year in some major consuming countries, including China."

Global demand growth is now projected at 1.62 million b/d this year for a 2005 total of 83.66 million b/d, OPEC said. For 2006, OPEC forecast demand will average 85.2 million b/d.

In the US, according to the American Petroleum Institute's midyear report, overall petroleum product demand softened in the first half of 2005 following strong growth in 2004.

Slowing demand growth for refined petroleum products during the first half of 2005 showed the "weakest results for a 6-month period since the first half of 2002," API said.

Growth in annual average gasoline deliveries slowed from 1.9% in 2004 to less than 0.5% during the first half of 2005. API said this reflected "the consumption-dulling effect of retail gasoline prices at their highest inflation-adjusted level since the early 1980s."

Residual fuel oil deliveries, following double-digit growth in 2004, fell more than 5% from their level of the first half of 2004, API said.

"Residual fuel oil prices have risen markedly in recent months, making natural gas more of an economic option for industrial and electric utility users with the ability to use either fuel," API said.

Weekly inventories
Crude oil futures prices on the New York Mercantile Exchange fell after a US Energy Information Administration July 20 report showed crude inventories declined less than analysts had expected after Hurricane Dennis and Hurricane Emily hit the Gulf of Mexico.

The NYMEX August contract for benchmark US light, sweet crudes on the New York Mercantile Exchange declined by 74¢ to $56.72/bbl. The August contract expired at the end of that trading session.

The EIA said commercial crude oil stocks declined by 900,000 bbl to 320.1 million bbl during the week ended July 15. Average crude oil imports rose to 10.825 million b/d, up 871,000 b/d from the week ending July 8.

Meanwhile, crude oil input into US refineries declined by 500,000 b/d to 15.6 million b/d with refineries operating at 92.8% of capacity. Gasoline production dropped substantially, averaging 8.5 million b/d, while distillate fuel production declined slightly, said EIA officials.

US gasoline inventories declined by 1.3 million bbl to 211.3 million bbl. Distillate fuel inventories rose by 2.3 million bbl—most of the increase was in heating oil—to 122.7 million bbl.

(Online July 25, 2005; author's e-mail: paulad@ogjonline.com)


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