IEA sees geopolitical risks still driving oil market
By OGJ editors
HOUSTON, June 18 -- In its most recent report, the International Energy Agency warns that while the geopolitical risk premium that drove the crude oil market from February until May might seem to have eased, it in fact has not. IEA sees little reason that oil market sentiment should be less bullish now than it was a month ago.
The Paris-based agency cites continuing Israeli-Palestinian tensions, the threat of global terrorism, and the war on terrorism in addition to delayed US-led military action against Iraq as evidence that there remains a heightened level of risk. IEA mentions the threat of a confrontation between India and Pakistan and concerns about the stability of Venezuela as additional reasons for unease.
At present, however, markets are focused on the near-term issues of high oil stocks, sluggish oil demand, and weak refining margins—and prices have slid. While so many factors in the market are unpredictable, namely economic recovery, demand growth, Iraqi exports, Russian production, quota compliance within the Organization of Petroleum Exporting Countries, as well as other factors, investors with no physical stake in oil can avoid these risks by taking their money to other markets until a clearer picture develops.
IEA says recent developments in the paper market show this has happened. Speculators have abandoned crude oil markets in favor of other commodities, placing downward pressure on oil prices. But during the second half of the year, economic growth—and therefore oil demand growth—is expected to tighten the market. The scope, pace, and timing of the economic recovery remain uncertain. With OPEC convening this week to review production policies, IEA asserts that there is every reason to expect that markets will require greater quantities of oil as the year progresses.
Demand
IEA has not changed its forecast for 2002 demand but has adjusted its quarterly estimates, noting that global oil demand appears to be pulling out of its slump (see table).
Worldwide oil product demand growth remains forecast at 420,000 b/d this year. The majority of this growth is expected to come from countries outside the Organization for Economic Cooperation and Development.
Following 3 quarters of contraction, global oil demand in the second quarter shows signs of a more vigorous recovery than expected. Also, the first quarter drop was milder than previously anticipated, reflecting revisions to US data for January and March. IEA anticipates that slower-than-expected growth later in the year will offset upward revisions to its first half estimates.
Early delivery data suggest that OECD demand contracted in April by 290,000 b/d vs. 1.2 million b/d a year earlier. US demand ended a prolonged slump in May following a year of nearly uninterrupted contraction. In the OECD Pacific region, South Korea's steep economic growth and accompanying oil demand growth sharply contrast with Japan's continued downturn. IEA expects European demand growth to weaken further before getting better.
Much of the strengthening in second quarter demand reflects consumption in China, where apparent demand is estimated to have increased for 8 consecutive months through May. During April and May, refiners—encouraged by government-mandated product price increases—reportedly hiked refinery throughputs to take advantage of improved margins.