Oil – Focus shifts to demand

Markets, especially oil and gas, are usually focused on supply as events around the world, such as the civil war in Libya, threaten to constrict supply to the economy. In times of economic trouble the focus on supply switches to worries about demand. Seemingly, the burden of national debt and with it the threat to Europe’s banking system and perhaps beyond has raised the spectre of another global recession hard on the heels of the last one. Oil demand is in focus.

The Arab Spring and the events in Libya in particular sparked concerns over supply, especially as Libyan light oil was much in demand in Europe. Now that the majority of Gadaffi forces look to be trapped in their last bastions of Sirte and Bani Walid there are signs that oil production could resume substantially during the rest of 2011. In its September 2011 report, the Organisation of the Petroleum Exporting Countries (OPEC) said that oil production in Libya in the far east and west of the country, combined with some production from the centre of the country, is expected to reach 1mbpd within the next six months. OPEC was also further upbeat about Libya based on information that it has received that oil production and export facilities had suffered little or no damage and that any infrastructure that has been damaged could be rebuilt quickly. OPEC, highlighting the importance of a new local security force for oil infrastructure, estimated that full Libyan oil production could be restored in 18 months or less.

Nonetheless, Libya’s oil facilities remains at risk especially while Colonel Gadaffi and members of his family remain at large. Recently, Reuters reported that forces loyal to the former Libyan regime had destroyed vehicles and equipment belonging to the Waha Oil Company, a joint venture with Libya’s National Oil Corporation, ConocoPhillips, Marathon and Amerada Hess. While, according to OPEC, the signs for a speedy return to full production are good now, a deteriorating security situation could change the scenario very quickly.

In February 2011, the price for oil headed upwards again as global markets worried about the loss of the Libyan supply and further spreading of the Arab Spring into other countries. If OPEC proves to be correct, Libyan production will be back on tap soon. As to whether other countries in the Middle East in addition to Syria and Yemen may be subjected to major civil unrest and send the oil market spiralling upwards again remains to be seen. In the meantime, with the ongoing Eurozone crisis threatening to derail the economic recovery, if indeed there ever was one, it is the demand for oil and its future perception that is leading its market now.

Global economics are almost impossible to call right. There are just too many factors and circumstances, some of which are usually unknown, which coupled with unexpected events, such as Japan’s earthquake, result in the global chaos that we call the market. However, sometimes there are signs and portents that one might point to for a sign of the way things are going. The emerging economies, most notably China and India, have long been regarded as long-term drivers for growth in energy consumption and oil especially. OPEC has downgraded its demand forecast for world oil growth in 2011 by 0.15mbpd to 1.1mbpd explaining that the driving season in the US has proved to be weaker than expected and that oil demand in China also has been lower than forecast. Oil demand growth for 2012 has also been revised by OPEC to 1.3mbpd with non-OPEC oil demand growth for 2011 now pegged at 0.5mbpd. Speaking at the Middle Petroleum and Gas Conference in Dubai recently, Ali Obaid Al-Yabhouni, UAE OPEC governor and the general manager of ADNATCO and NGSCO, the shipping arms of Abu Dhabi National Oil Company, reportedly said, “After several years in which attention was focused on supply, it is now evident that we need to keep a close eye on demand, despite the fact that emerging economies have accounted for the bulk of the oil market’s demand growth over the last few years, notably China and India.”

Almost everywhere one looks for leadership, the talk is of austerity and paying down debt. Political leaders should not be surprised therefore that these measures have already been and continue to be applied by the world’s populations by choice and by necessity. According to the UK Automobile Association (AA), more than one in four of its members are now forced to limit the amount that they spend on fuel which dovetails with OPEC’s reported surprisingly low US driving season. It would not be a surprise if this pattern is widespread – household spending figures in the UK are dropping too. With China and India more reliant on export markets than on domestic ones and if particularly US and European consumers are cutting back, then China and India will not need the levels of commodities, including oil that they have in the past. Demand for oil should fall.

Getting the economy back to what it was looks difficult, perhaps even impossible. With all-time low interest rates there is little incentive for people to save and using any extra cash on paying back bank debts and credit cards with rates up into the high 20 per cent range is simply, “a no brainer.” This behaviour is and will continue to affect the demand for oil and for oil related products. One way or the other the key word here is stability. “Our aim is not to produce a few extra barrels over the coming months,” said Yabhouni, “but to endow ourselves with the capability to continue exporting oil and gas at stable rates into the next decades, for the benefit of future generations.”

The focus of nations is to grow their economies. The trouble is that growth in almost every natural and business scenario has a peak. For some developed nations it may just be that growth has gone about as far as it can for the economic scenario that we are now in. As for stability, Yabhouni may be right, if oil prices could stay within a stable band between US$85.00-100.00/barrel in a low-inflation economy then the oil industry and its consumers could probably live with that very well.