World oil markets appear to be losing steam as traders face the prospect of slower global growth, including in emerging markets like China, where an apparently insatiable demand for energy is easing.
With plenty of spare production capacity among OPEC members and worldwide inventories running high, a slump in global demand could, in the coming months, push prices back CL-FT to levels not seen since early 2009, analysts said Wednesday.
In its monthly outlook released Wednesday, the International Energy Agency actually raised its forecast for global demand marginally but also warned about “significant downward risks” to that forecast in the face of a potential global slowdown.
The agency, which advises rich countries on energy matters, is already forecasting a decline in oil demand among the members of the Organization for Economic Co-operation and Development, or what used to be called the “industrialized world.”
“If predictions of a double-dip recession affecting key OECD countries were to be realized, this year’s growth would be negligible or flat and next year’s expected decline steeper,” the IEA said.
In the past 18 months, strong growth from the non-OECD countries, led by China, has more than overcome weakness in North America, Japan and Europe. But those emerging economies are also expected to post slower growth in the second half of this year, and could be hit hard by double-dip recessions in the OECD.
The Paris-based IEA calculates that if global growth were to hit 3 per cent next year rather than the expected 4.5 per cent, that would shave some 1.2 million barrels a day off global oil demand next year.
Oil market traders on Wednesday joined in the general market selloff on fears about the slowing global economy, driving crude prices down $2.23 (U.S.) a barrel – or 2.8 per cent – to $78.02 on the New York Mercantile Exchange.
And IEA analysts noted that the spread between current prices and long-term futures contracts has narrowed considerably, suggesting “the market is less bullish about price strength in the longer term.”
Toronto-Dominion Bank economist Dina Cover said she expects crude prices to swing between $75 a barrel and $85 until the end of 2011, assuming the economy doesn’t slow down more than anticipated.
“The fundamentals are still pretty weak – inventories are still elevated around the world, supply is outpacing demand and that’s likely to continue,” Ms. Cover said. “And with demand to remain sluggish, you can’t see prices going too much higher.”
She said China remains the key, as it has been driving growth in demand worldwide.
“If we see a marked slowdown in consumption there, that will definitely have an impact on prices. We could definitely see prices even lower” than $75.
The IEA forecasts that increases in Chinese oil consumption will slow dramatically from a 12-per-cent clip in the first half of 2010, to 4.6 per cent in 2001, as the country winds down its enormous stimulus program and its export markets weaken.
At the same time, members of the Organization of Petroleum Exporting Countries (OPEC) are ramping up production and may be unwilling to cut back as demand falters, said Michael Lynch, president of Strategic Energy and Economic Consulting Inc.
“We have not seen a lot of discipline out of OPEC – not that we’ve needed it – but it makes people worried that, going out [some months], we will be oversupplied,” he said.
