Growth in global demand for oil

Oil may ride on global economic recovery

AS THE world remains well supplied, the growth in global demand for
oil will play a key role in maintaining the balance. Sustenance of the
global economic recovery is, therefore, vital.

THE recovery in the global crude oil prices that recently crossed $87
a barrel will remain closely linked to the economic growth in
developed countries, going forward, as supplies remain ample and
growing. The latest estimates put the incremental demand at 1.5
million barrels per day (mbpd) for 2010 and 1.6 mbpd for 2011 assumed
on a world economic growth of 3 % per annum. The global supply is
growing satisfactorily to keep the world well oiled throughout this
period. In fact, the OPEC's spare capacity the amount of additional
production that can reach market within a month's notice is likely to
continue rising beyond 5 mbpd, or 5.8%, of the estimated global
consumption of 2010.

The pace of the global economic recovery and the extent to which the
key economies continue their stimulus and other economic policies
remain the key uncertainty going forward. The Energy Information
Administration (ELA) of the US government mentioned in its recent
report that as long as the global economy continues to recover, and
the Organisation of the Petroleum Exporting Countries (OPEC) remains
satisfied with its constrained supply targets, global oil markets
should remain firm.

Despite continued positive signals about the global economic recovery
coming from the manufacturing and services sectors, there are some
signs that the momentum is slowing in some OECD regions in the first
and second quarters even as growth continues strongly in China and
India. In its monthly report on, the global oil industry, OPEC
mentioned: "In the US, data was mixed, while services picked up in
February, manufacturing growth moderated and the housing, sector
problems resurfaced, as indicated by the latest negative round of home
sales. Despite some improvement, unemployment also remains at
historically high levels."

In Europe, too, all is not well as shown by the latest problems with
the Greek economy. OPEC's report mentioned: 'Although the outlook for
the current and the coming quarters may be slightly better than in Q4
'09, the recent turbulence in financial markets related to Greece's
fiscal problems has unsettled the euro, and the fallout has impacted
confidence and drawn attention to the divergence in growth potential
and fiscal stance among the various countries in the euro-zone." In
Japan, while a recovery in exports has boosted industrial production,
the pace of recovery is expected to slow in the first quarter and high
government debt has initiated a debate on the need for increased
taxes. While the growth in demand continues to link with the global
economic recovery, the supply continues to grow. "The projected demand
for OPEC crude is still much less than current OPEC production by
around 1.5 mbpd, acknowledged OPEC. The natural fallout of such a
situation is increase in oil inventories. The crude oil inventories in
the US, which had touched an all-time high in April last year and were
on a downtrend since then, have again picked up pace. Sofarjn2010, the
inventories have gone up over 9% to 356.2 million barrels from 326
million barrels as at dose of 2009.

Increasing supply of alternative fuels, too, could prove a burden for
the recovery of oil prices. For example, ethanol consumption that was
just 1% of the US gasoline consumption in 2000 is likely to reach 9%
in 2010. Similarly, OPEC's natural gas liquids, which are not
regulated through quotas, are expected to grow 0.6 mbpd in 2010 and
0.7 mbpd in 201l. In the meantime, shift towards cheaper and cleaner
natural gas will also continue.

After witnessing a period of thin cushion in 2008, the oil industry
appears very comfortably placed with substantial and growing spare
capacity. In fact, the rising inventory levels hint at production
exceeding, the market needs. As a result, the crude oil prices lack
the fundamental support to move upwards from current levels.
Economic Times, New Delhi, April 12, 2010