BMI: Only small increase seen in 2009 oil consumption

Global oil consumption will increase by 0.6%, representing a decline of 1.3% in OECD countries and an increase of 2.3% in non-OECD countries, according to analyst Business Monitor International.

Jan 6th, 2009

Eric Watkins
Oil Diplomacy Editor

LOS ANGELES, Jan. 6 -- Global oil consumption will increase by just 0.6%, representing a decline of 1.3% in Organization for Economic Cooperation and Development countries and an increase of 2.3% in non-OECD countries, according to analyst Business Monitor International.

BMI estimates the overall increase in demand to reach 500,000 b/d, with North American demand contracting by at least 520,000 b/d and European demand also falling slightly.

It cites the International Energy Agency's December Oil Market Report (OMR), which predicts growth in 2009 oil demand of 0.5%, with an increase in global consumption of 440,000 b/d.

IEA expects a decline of 330,000 b/d in North America. OECD demand is forecast to fall by 1.4%, with the non-OECD countries consuming an additional 2.9%.

In the US, the Energy Information Administration is now forecasting 85.3 million b/d of 2009 global oil demand, down 450,000 b/d from the estimated 2008 level.

EIA predicts non-OECD demand to increase by 1.5%, with OECD demand down by just 10,000 b/d.

It expects consumption in the US and Canada to contract by just 270,000 b/d.

"The EIA is clearly overly optimistic regarding the outlook for OECD demand but [is] more cautious for the developing countries," said BMI.

OPEC's December report suggests a likely decrease in 2009 global oil consumption of 0.18%, making it the most bearish of the forecasters.

It puts demand contraction at 150,000 b/d for the year. Non-OECD consumption is expected to increase by almost 2.2%, which means OPEC predicts a fall of nearly 2.1% in OECD demand or around 980,000 b/d.

In North America, OPEC predicts the decline to be 580,000 b/d.

2009 oil supply
According to the BMI model, 2009 global oil production will increase by just 0.4%, representing an OPEC increase of 0.1%, and a non-OPEC production boost of 0.5%.

"We have assumed OPEC production cuts in the first half, but with some reversal in the second half," BMI said.

BMI also has assumed that some OPEC members, such as Nigeria and Iraq, will increase output despite the organization's target of reduced volumes from January 2009. The overall increase in supply is estimated at just 265,000 b/d.

IEA's December OMR predicts non-OPEC supply growth in 2009 of 480,000 b/d, or almost 1%, according to BMI.

"We believe this to be an optimistic assessment of potential non-OPEC production growth, even before the possible impact of price-induced spending cuts," BMI said, adding that, "The IEA does historically overestimate non-OPEC oil supply."

EIA forecast in December 2008 a 410,000 b/d rise in non-OPEC oil output, representing a gain of 0.8%. EIA expects world oil production to be 85.14 million b/d in 2009, down from 85.52 million b/d in 2008.

"The US organization clearly expects a sizeable downturn in OPEC oil output," BMI said.

OPEC itself sees 2009 non-OPEC supply rising by 640,000 b/d, which the analyst said "looks to be an ambitious level."

With a large step-up (up 610,000 b/d) in OPEC natural gas liquids, the implication is that OPEC crude production will need to fall substantially.

In fact, the December OPEC monthly report argues that first-quarter 2009 OPEC crude production will be down 2.3 million b/d from first-quarter 2008.

Long-term oil demand
The BMI model now predicts average oil demand growth of 1.17%/year during 2007-13, followed by 1.42%/year in 2013-18.

Following the forecast 0.5% demand contraction in 2009, BMI is assuming 0.58% growth in 2010, followed by 1.42% in 2011.

It said this growth reflects a bottoming out of the global economy over the next 18 months, before recovery gets underway in second-half 2010.

Growth will accelerate in 2011-13, BMI said, before slowing again as energy-saving initiatives take effect towards the end of the forecast period.

OECD oil demand growth is expected to remain weak to 2018, reflecting market maturity, the ongoing effects of recent demand destruction, and a greater commitment to energy efficiency.

Following the predicted 1.3% decline in 2009 OECD oil consumption, BMI expects to see a reduction of 0.05% in 2010.

The recovery forecast for 2011-12 delivers annual gains of 0.43% and 0.64% respectively, it thinks.

"We expect growth trends to turn negative once again beyond 2014," the analyst said.

On average, OECD demand is forecast to fall by 0.64%/year during 2007-13, and by 0.18%/year in 2013-18.

For the non-OECD region, the demand trend to 2013 is for 2.84% average annual market expansion, followed by 2.65% in 2013-18 as economies mature and energy-efficiency begins to play a role.

"We do not expect the region to avoid the downturn completely, with 2009 growth of 2.29%—well down from 2.87% in 2008 and 3.49% in 2007," BMI said, adding that demand growth is forecast to recover to 2.71% in 2010, then rise further to 2.83% in 2011.

Compared with the BMI forecasts, IEA's medium-term view is for global oil demand growth to average 0.97%/year during 2008-13, with consumption expanding by 1.2% in 2010 and 1.3% in 2011.

For the OECD countries, growth forecasts are negative throughout the period, with demand falling typically by 0.1%/year.

The non-OECD oil market is set to expand by an average 31.7%/year in 2008-13, with growth accelerating towards 3.4% by the end of the forecast period.

Long-term oil supply
BMI sees global oil supply increasing by an average 1.52% annually during 2007-13, with a yearly gain of 1.37% predicted in 2013-18.

It expects growth to be at its slowest in 2009, but averaging more than 2% in 2010-13. The analyst said this growth rate is "particularly vulnerable to spending cutbacks from 2009 resulting from lower oil prices."

Non-OPEC oil production is expected to rise by 0.63% in 2007-13, then 0.38% in 2013-18. OPEC volumes are forecast to increase by an annual average of 2.61% during 2007-13, easing to 2.46%/year in 2013-18.

IEA is assuming an average annual 0.52% increase in non-OPEC oil supply in 2008-13.

BMI said supply projections beyond 2010 are at risk from reduced international oil company and national oil company spending.

It explained that OPEC in particular will be reluctant to add extra spare capacity if the demand is not there to use it, while IOCs may delay spending on major oil sands and deepwater projects if there is scope for price weakness that will undermine returns and project economics.

Oil price assumptions
An early and sustained recovery in oil prices during the latter part of 2009 should mean that most investment programs are secure.

The OPEC basket price, having averaged an estimated $94.08/bbl in 2008, is now forecast to be $52/bbl in 2009.

This represents $40 during the first quarter, which BMI expects to be the weakest period, recovering to $52 in the second quarter as OPEC supply cuts impact the price.

During the second half, BMI expects the price to move back into a $55-60/bbl range if OPEC continues to manage production effectively.

Brent, WTI, and Urals prices for 2009 are put at $55.65, $56.63, and $52.48/bbl respectively. BMI said EIA is now using $51/bbl as its central assumption for WTI in 2009.

"With oil demand growth still relatively subdued in 2010, and a likely pick-up in non-OPEC supply expansion, there is limited scope for OPEC to boost output during the year," the analyst said.

However, if it can exercise reasonable restraint, BMI sees scope for a continuing oil price recovery and is now forecasting an average OPEC basket price of $58/bbl for the year.

"By 2011, there should be greater growth in oil consumption and more room for OPEC to regain market share and reduce surplus capacity through higher production quotas," BMI said.

The analyst is assuming a further increase in the OPEC basket price to an average $65/bbl, implying Brent at $68.70/bbl, WTI at $69.60/bbl, and Urals at $65.50/bbl.

"For 2012 and beyond, we are now using a central case forecast of $70/bbl for the OPEC basket, down from our earlier long-run forecast of $90," BMI said in its report.

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