Despite Recent Dips In the Price Of Oil, Demand Increases Through 2012 May Outpace Supply

Aug. 18, 2011 - PRLog -- Oil prices rose on Friday in continued volatile trading as stronger equities markets and data showing higher U.S. retail sales in July provided a boost, but a tumble in consumer sentiment capped crude's gains. The driving forces of the oil market—the U.S. and China—appear to be stalling at the same time. Recent oil demand data has shown that oil demand in both countries is coming in below expectations. China’s consumption is growing more slowly and U.S. demand is shrinking. Bearing in mind that the U.S. is the world’s largest user of oil and China the fastest growing consumer, this scenario indicates the recent drop of more than 10% in oil prices may only be the beginning. Oil prices have tumbled during the past weeks from highs just a month ago as global demand slows in tandem with the economic growth prospects, especially in industrialized countries. But the breather will be short lived, barring a double dip recession, because OPEC countries remain unable to increase production to balance demand.

The IEA in its August oil market report released earlier this month cut its demand outlook for the remainder of 2011 by a measly 60,000 barrels per day, compared to annual demand of nearly 90 million bpd. For 2012, it raised its forecast by 70,000 bpd. The revisions include the latest market turmoil and growth forecasts. Year on year, global oil demand will rise 1.2 million bpd in 2011 and 1.6 million bpd in 2012, according to the IEA. Meanwhile, non-OPEC oil supply will only rise by 0.4 million bpd in 2011 and by 1 million bpd in 2012, and OPEC countries are increasingly unable to raise production to make up for the difference, despite Saudi Arabia pumping at the highest level in three decades, IEA numbers show. The result is that the world’s effective spare capacity continues to decline, from 3.6 million barrels per day just a couple of months ago to 3.3 million bpd currently, with more decreases expected, especially if Libya’s conflict continues to drag into a stalemate. The narrower the margin, the more oil and pump prices could rise, and the higher the risk of a global double dip recession.

While an even deeper drop in energy prices would certainly be a boon for the struggling European economy, the reasons for it hardly give cause for cheer. Oil futures and equities markets were buffeted this week, starting when trading resumed after the downgrade of the U.S. credit rating by Standard & Poor's late last Friday. Monday's market swoons were followed by volatile trajectories on Tuesday when the U.S. Federal Reserve noted weaker economic growth and promised to keep benchmark interest rates near zero through mid-2013. Then weekly oil inventory reports from industry and government showed a surprise and sharp drop in U.S. crude stockpiles and slips in refined product stocks, supporting oil prices.

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