The International Energy Agency (IEA) has raised its estimate for global oil demand by 120,000 barrels/day for 2011, to a total of 89.3 million barrels/day. The increase came as a result of greater demand from emerging economies in Asia and a more positive outlook on economic recovery in the US.
In its monthly Oil Market Report, the IEA notes that capital spending on upstream projects is boosting non-OPEC supply and than OPEC production of natural gas liquids will meet the expected demand increase.
Calling the current market price for Brent crude of more than $100/barrel a “dalliance”, the IEA points out that commercial stocks are high, OPEC spare capacity is adequate, and governments’ strategic inventories are stable and should “provide a cushion against
unexpected events in either supply or demand.” Essentially, IEA is saying there is no fundamental reason for crude to rise to $100/barrel.
The demand driver is China, where the IEA says that demand groew 15.1% year-over-year. Total demand in China now tops 10 million barrels/day for the first time ever. The largest portion of that demand gain is for gasoil, which China uses as fuel for its small scale electricity generators. As China closes more small coal-fired plants, gasoil (as diesel fuel) powers generators to provide electricity.
On the supply side, crude production in December fell by 300,000 barrels/day, to 88.1 million barrels, as non-OPEC supply declined due to weather and technical problems. OPEC supply reached 29.58 million barrels/day in December, up 250,000 barrels/day, and OPEC spare capacity is now estimated to be 4.7 million barrels/day, the first time that spare capacity has fallen below 5 million barrels/day in two years.
Supply from non-OPEC producers fell by 500,000 barrels/day in December to 53 million barrels/day, mainly as the result of outages in Russia Australia, and elsewhere.
On pricing, the IEA reported that futures prices rose for the fourth consecutive month in December, trading in a range of $88-$92/barrel. The price rose as a result of economic growth in Asia, higher demand from developed countries, and a drawdown on commercial stocks, especially stocks that had been in floating storage. Cold weather in the northern hemisphere contributed to the higher prices.
The benchmark price of West Texas Intermediate, WTI, is falling due to the higher levels of inventory at the Cushing, Oklahoma, storage facility. Even as the Cushing capacity is being expanded beyond 40 million barrels, the new capacity fills up quickly because the continuing contango in the oil market encourages holding the oil for future sale.
The main takeaway from IEA’s monthly report is that there are really no fundamental reasons for the spike above $100/barrel, and the price should moderate. Supply should also be able to meet demand, even as demand grows during the course of the year. As always, the weak economic recovery in developed countries and the inflationary pressures in emerging countries could change the forecast in a heartbeat.