Oil demand amid tumult

Aug. 15, 2011
Tumult in international markets raises large questions about oil demand in the next couple of years.

Tumult in international markets raises large questions about oil demand in the next couple of years. Inevitably, answers depend on performance of the global economy, which at this point is impossible to predict.

August 2011 has been a wild month. The US Congress barely met an Aug. 2 deadline for the budget deal it needed for political reasons before it could lift the government's debt ceiling. The Department of the Treasury had warned that without new borrowing it wouldn't be able to meet all obligations.

Fear spread that default would result in an historic lowering of the government's premier credit rating. On Aug. 5, one of three major credit judges, Standard and Poor's, lowered its US rating anyway.

Markets quake

Equity and commodity markets quaked. On Aug. 8, the Dow Jones Industrial Average (DJIA) plunged. Stocks rebounded on Aug. 9 after the Federal Reserve indicated it would keep interest rates low into 2013.

But jitters returned Aug. 10 as stocks of major US and European banks lost value and worry grew about the possible downgrade of France's credit rating.

The turmoil has a strong political dimension, of course. Standard & Poor's made the nasty budget fight a factor in its decision to mark down US creditworthiness. But political stresses overlie deeper worries about a slowdown in the global economy and the chance for another recession.

While markets tried to sort all this out last week, the three main gauges of oil supply and demand issued their monthly reports, each updating its projections for demand this year and next.

To summarize: the International Energy Agency, US Energy Information Administration, and Organization of Petroleum Exporting Countries haven't slashed their forecasts. Their analyses, however, ooze caution.

Of the three agencies, EIA sounds the most cheerful. "Despite continued concerns over the pace of the global economic recovery," it said in its Short-Term Energy Outlook for August, "EIA expects world consumption to grow by 1.4 million b/d in 2011 and by 1.6 million b/d in 2012, outpacing average global demand growth of 1.3 million b/d from 1998-2007, prior to the onset of the global economic downturn." The US agency projects global oil consumption of 88.2 million b/d this year and 89.8 million b/d in 2012.

OPEC pointed out that since 2009 the world economy has outperformed prerecession trends. But it cited problems, including spreading weakness in economies of developed countries and exhaustion of stimulus spending by governments. In its Monthly Oil Market Report, OPEC viewed US performance with special concern.

Recent, "rather surprising" revisions to data on the US gross domestic product "reveal that absolute GDP has not grown since 2007 and that growth in the first half of this year now stands at an annualized rate of barely 1%."

The group expressed concern about Greece's sovereign-debt crisis and "a worsening situation in Italy and Spain" and noted efforts by central banks in major developing countries to moderate inflation by raising nominal interest rates. "Most leading indicators point to a continued slowdown in industrial output," it said.

OPEC's August forecast for 2011 oil demand is down slightly from the July figure. At 88.1 million b/d, it's the lowest among outlooks by the three agencies but, like the others, remains above what was projected for the year in January.

GDP sensitivity

IEA left its demand projection for 2011 at the prior month's 89.5 million b/d. But its August Oil Market Report said, "Our global 2011-12 GDP growth assumption in excess of 4% might seem optimistic in the present climate."

If global GDP growth averages 2.8% instead of the base-case 4.2%, average demand this year will drop to 89.1 million b/d, it said.

For next year, IEA projects average demand of 91.1 million b/d assuming 4.4% GDP growth. If GDP instead grows by 3%, demand will be 1.3 million b/d lower.

The message: Oil demand isn't collapsing. But if August projections prove wrong, corrections very likely will be downward.

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