Syed Rashid Husain
CRUDE markets continue to fluctuate, at the slightest pretext, oscillating in a narrow band. Prices have already fallen by around a quarter over the last three months with North Sea Brent dipping below $100 per barrel, down from a high above $128 in March, as supply outstripped demand.
And despite some blips on the chart, here and there, the overall emerging scenario is indicative of a weakening market in the mid-term too. Analysts are now concurring that headwinds would continue to batter the crude markets in 2013 too.
Major players on the energy scene - the OPEC, the Paris-based IEA and the US EIA - all seem to underline to varying degree that crude markets would continue to be soft into 2013 too.
Global economic slowdown could put a lid on oil prices, the International Energy Agency said in its just released Oil Report. It underlined that oil market fundamentals had "clearly eased since the start of the year" and stocks had built up significantly over the last few months.
Concern that global demand may falter further got a fillip after South Korea unexpectedly cut interest rates, Australia’s jobless rate rose and economists said European manufacturing stagnated last month.
And while global economic horizon is definitely getting murky, a major impact on crude demand growth is coming over from China, the world’s second largest consumer - the only major bright spot on the global economy over the last few, is facing rather difficult years. China’s implied oil demand fell 0.4 percent in June from a year earlier to the lowest in 20 months as refineries scaled back production and raised fuel exports to trim bulging stockpiles, caused by a lack of buyers and losses resulting from the government cutting fuel prices for consumers three times over the past two months.
This was the second time that the Chinese implied oil demand has contracted so far this quarter, and that is likely to further dampen global oil prices. China burned 8.96 million barrels of oil per day (bpd) last month, the lowest since October 2010, Reuters calculations based on preliminary government data said.
The data also showed that China’s oil consumption for the first half of the year rose a modest 2.2 percent year-on-year to about 9.5 million bpd. Oil consumption for the whole of last year was 6.3 percent more than 2010.
Industrial production in the euro area probably failed to increase in May after two months of decline, according to the median estimate of economists surveyed by Bloomberg.
Thus with global economic horizon turning cloudy, the IEA reduced its forecast for demand in 2012, cutting it by 15,000 b/d to 89.89m bpd. For 2013, the IEA estimates world oil demand at 90.9 million bpd, saying fuel consumption in the developed economies of the Organization for Economic Co-operation and Development (OECD) will be overtaken for the first time by non-OECD demand, "a trend that is unlikely to be reversed".
OPEC is also on the same page on the issue. World oil demand growth will slow in 2013 from the already weak 2012, OPEC said in its monthly report, citing Europe’s debt worries, a faltering US economic recovery and deceleration of growth in emerging markets.
"Besides the euro zone crisis, geopolitical tensions in the Middle East, the contraction of manufacturing in the US for the first time since 2010 and decelerating economic growth in emerging markets have been fuelling uncertainties regarding global economic growth," OPEC said in a monthly report. Global oil consumption will rise (only) by an average of 900,000 barrels a day this year, or about 1 percent, OPEC projected in its monthly report. Growth will, however, slow further in 2013 to 800,000 barrels a day as the global economy cools, the 12-member producers’ group’s first assessment for next year said.
"The fact that the departure of Greece from the euro zone, with a severe impact on the euro zone economy, still cannot be ruled out remains a cause of concern," OPEC added. "Such an action would provoke a massive capital outflow from the country and result in a default of its fiscal obligations, with a destabilizing effect on the euro zone and beyond."
Earlier last week, the US government energy agency, the EIA, too cut its global oil demand growth estimate for 2013 by 360,000 bpd to 730,000 bpd only.
In the meantime, supplies are outstripping demand too, impacting the balance further. The IEA said the 12 members of OPEC pumped close to 31.8 million bpd in June, before the imposition of an EU oil embargo on Iran on July 1 and tougher US sanctions. This was 1.3 million bpd higher than its estimated call on OPEC crude this year and in 2013, and helped contribute to a further increase in global oil inventories.
And in the meantime, non-OPEC output is also high and rising, the IEA said, forecasting an overall increase of around 700,000 bpd in 2013 to 53.2 million bpd after an increase of about 400,000 bpd this year. Much of this increase is to come from the US where production of light crude oil from shale deposits in Texas, North Dakota and other mid-western states is rising sharply.
Markets thus continue to be oversupplied amidst a sort of demand destruction, impacting the crude markets as it prepares to enter 2013.
The only silver bullet on the crude horizon is the stimulus packages, being discussed these days in major global capitals. Goldman Sachs analysts said expectations for more monetary easing from the global central banks could provide some upside to the markets. "Central banks around the world continue to adopt measures to attempt to support world economic growth, and indirectly, world oil demand," Goldman said last week.
While energy geopolitics continues to sway output, markets and its psyche, crude prices are in for some more battering in the months ahead, one could now say with some degree of confidence.