Only deep recession will end high oil prices
By Lucia Dore
22 March 2008
DUBAI Only a deep recession leading to a slowdown in Asian growth will end
high oil prices, according to the London-based Centre for Global Energy Studies
(CGES) in its monthly oil report dated March 17.
What needs to happen to bring about a significant weakening in oil prices is a
recession in key oil-consuming economies, a slowing up of the Chinese economy,
more non-Opec supplies and an acknowledgement by Saudi Arabia that the oil
market should be supplied with more oil, says the CGES notes. In recent days,
crude oil has been trading at around $111/bbl.
The CGES also says: Opec appears determined to follow a high-price policy,
keeping a tight rein on production, and although the world needs more oil from
the Opec countries, there is no sign they are willing to supply it.
The CGES also acknowledges suggestions that Opec has decided to defend a price
nearer to $90/bbl than the 60/bbl we believe necessary for its members to
ensure their budgets balance. However, based on the research centres own
supply and demand forecasts, Opec would be acting to defend a price floor of
around $75/bbl.
The CGES says that Opec is apparently concerned that over-supply in a
weakening market will undermine prices, ignoring the argument that under-supply
will continue to push prices to levels that will hasten the weakening of the
market and erode demand.
The research firm also asserts that Opecs focus on oil supply in the OECD,
and the US in particular, is flawed because it is only looking at part of the
market, and the less important part in terms of demand growth when it takes its
output decisions. Opec, therefore, has an incomplete picture of oil
inventories when it claims stocks are above their five-year-average level, the
CGES says.
When oil stocks are considered on a global basis that is when stocks are
measured in terms of the forward demand cover they provide the worlds oil
stocks are as low as they have been at a time in the past decade, it
concludes. Moreover, this is at a time when the industry wants to hold more
oil in reserve to cope with possible supply disruptions in the face of Opecs
reluctance to act quickly to supply more oil than needed, it adds.
Yet despite record high prices, oil demand growth remains strong in key Asian
countries, especially China, although there are signs of a slowdown in demand
for its exports. Should its exports begin to contract, Chinas growth will
slow and Asias incremental oil demand will moderate, triggering a change in
direction for oil prices, the CGES says.
A slowdown in demand for oil by the OECD is more likely. The research study
predicts that OECD demand for crude oil will fall by some 330,000 bpd (-0.7 per
cent) over the course of 2008 and will continue to drop over the course of 2009
(-0.6 per cent, 310,000 bpd). In the developing world, oil demand growth is
expected to be moderate, at 2.5 per cent or 930,000 bpd. This growth will be
led by China, India and the Middle East, all of whom have rapidly expanding
economies and enjoy subsidised oil product prices, the research note states.
On the supply side, only limited growth in non-Opec production is expected.
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