Outlook for the Second Half of the Year - Jun 11

Source: OPEC_RP110602 6/15/2011, Location: Europe

In recent weeks, the market has been experiencing excessive volatility. Recent economic data and releases point to a widening slowdown in global manufacturing activity and persistently high levels of unemployment. Concerns about the debt burden in the OECD area have also become more pronounced, at a time when major economies are preparing for the inevitable transition to fiscal consolidation with the end of quantitative easing.

In the emerging economies, continued rapid growth has raised the risk of overheating and inflationary pressures. Despite these challenges, world growth in 2011 remains at 3.9%, driven by strong momentum in the emerging economies and steady growth in the OECD.

The outlook for global oil demand in the second half of the year also shows a similar dichotomy. In the OECD, the tragic events in Japan continue to impact consumption and it is yet unclear when recovery efforts will result in a rebound. Additionally, the latest monthly data from the US shows much weaker-than-expected oil demand, affected by the impact of higher retail prices. In contrast, developing countries are expected to show continued strong growth, accounting for more than 90% of the increment. Moreover, anticipated shortages in power generation this summer in China are likely to boost the use of diesel generators, which could strengthen demand growth over the coming months.

On the supply side, the current forecast for non-OPEC production is much higher than was expected at the beginning of this year. The upward adjustment has been supported by North America, Latin America, the FSU and China. Since January, US production has experienced a considerable upward revision due to the increasing output of shale oil. Elsewhere in North America, efforts to slow the decline in production in Mexico have supported the outlook, as has the ramp-up of oil sand production in Canada. Upward revisions have also been seen in Brazil and Colombia on the back of healthy supply. In China, forecast growth also experienced an upward revision due to strong output from the new offshore developments.

At present, OECD commercial stocks remain stable. Despite a decline in the inventory overhang since June of last year, crude oil stocks remain above the five-year average. Additionally, the steady build up in commercial and SPR stocks in non-OECD areas continues. China alone has raised its crude stocks by more 100 million barrels in recent years and a further 5 million barrels are expected to be added this year.

Although falling since April, floating storage still stands at around 64 mb, providing immediate supply available to the market Additionally, OECD commercial stocks in days of forward cover currently stand at around 58 days, which is above the historical norm.

Looking to the remainder of this year, the expected supply/demand balance indicates a tightening market. As a result, global inventories could continue to decline as the market enters a period of high seasonal demand. In quarterly terms, global consumption is projected to increase by 2.3 mb/d in the coming quarter and to add a further 0.2 mb/d in the fourth. At the same time, non-OPEC supply and OPEC NGLs are only expected to add around 0.2 mb/d and 0.6 mb/d in 3Q and 4Q respectively.

This would result in much higher demand for OPEC crude, reaching a level higher than current OPEC production and implying a draw in inventories. Despite the inherent uncertainties in the demand for OPEC crude stemming from both the supply and demand side, this would leave a sizeable gap between current production and the demand for OPEC crude.

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