China's energy juggernaut is revving up, boosting global oil demand beyond what was expected and creating an opportunity for Canadian producers now focused on the U.S.
Analysts recently have revised their forecasts for global crude consumption this year and next, based largely on China's resurgent economy and giving even more support for oil prices that have jumped on the back of a weakened U.S. dollar.
But the overall picture masks a tale of diverging trends: Demand is expected to climb sharply in emerging countries with the return of stronger economies and pent-up demand for automobile purchases among rising middle classes. In contrast, demand peaked four years ago in richer countries, including the United States, and many analysts say it is unlikely to recover that ground any time soon.
That disparity creates huge incentives for Canadian-based oil companies to support pipelines to the West Coast to supply the booming Asian markets, said energy economist Peter Tertzakian of Calgary-based ARC Financial Corp.
“Selling into a declining or even stagnant market is a difficult thing to do, especially when it is your only market,” Mr. Tertzakian said. “Which is why it is paramount for Canada to be thinking about opening up other markets, in particularly the growth markets of Asia for our product.”
Canadian oil sands producers are currently counting on winning a larger share of the U.S. oil market as Mexican and Venezuelan imports decline. However, analysts say they will be fighting for a bigger share of a shrunken pie.
Exporting the bitumen to Asia would avoid a glut of Canadian heavy oil in U.S. markets and allow for higher production from the oil sands.
Enbridge Inc. to shelve its Gateway project to B.C. several years ago due to lack of support from producers. Now, even with plans to dramatically expand export capacity into the U.S., Enbridge says there is keen interest among oil companies for a pipeline to the coast to provide access to new markets.
The prospect of rising demand in emerging economies should once again provide support for oil prices – just as rapid growth in China, India and the Middle East contributed to the runup between 2003 and 2008 that resulted in record oil prices of $147 (U.S.) a barrel.
Crude prices rose sharply Tuesday after the Organization of Petroleum Exporting Countries (OPEC) said world oil demand will be stronger than it had expected this summer. OPEC's bullish pronouncement came after upward revisions by the U.S. Energy Information Administration and the Paris-based International Energy Agency, which advises industrialized nations on energy matters.
On the New York Mercantile Exchange, crude was up 88 cents to $74.15 (U.S.) a barrel, after touching a seven-week high of $74.47.
Oil prices have also climbed in response to a lower U.S. dollar, as investors look for safer havens to hedge against inflation and a declining U.S. currency. But the recent demand revisions provide some fundamental underpinning to the market.
“Prices are higher in anticipation of higher demand,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Mass.. “We have yet to see demand recover, but as long as there are upward revisions of future demand, there will be support for prices.”
After a succession of downgrades to its demand forecast, OPEC turned marginally more optimistic in a report released Tuesday, saying China's faster-than-expected recovery should boost demand in both 2009 and 2010.
OPEC said global crude consumption is now expected to fall by nearly two million barrels a day in 2009, somewhat less than anticipated, while it will grow by 1.1 million b/d next year, an increase from its forecast of 200,000 b/d.
The cartel said virtually all of the higher consumption will occur in emerging markets.
China Tuesday reported that automobile sales have soared 78 per cent in September from a year earlier, widening a lead over the U.S. as the world's top auto market, with sales spurred by tax cuts and government stimulus spending.
In contrast, the industrialized world will experience little growth in oil consumption in the coming years, as slow economic growth, an aging population and government environmental policies combine to keep a lid on fuel use, according to a report by IHS Cambridge Energy Research Associates (CERA).
The Boston-area consulting firm expects global crude demand to increase from 84 million barrels b/d this year to 89 million 2014, with growth occurring primarily in emerging economies. For the leading industrialized economies, CERA forecast growth of just 900,000 b/d in the next five years after demand fell by 3.7 million barrels from 2005 to 2009.
