Forecast for 2005
Despite the slight upward revision to total world GDP indicating a growth rate of 4.14% for 2005 compared to the 4.09% projected last month, world oil demand growth has been revised down slightly from last month’s estimate. The marginal revision is the result of first- and second-quarter data for some major oil consuming countries such as USA and China pointing to lower consumption than previously expected. A divergence from rates of economic growth and consumption of oil appears to exist with the historical income elasticities of demand behaving differently. This is not a new phenomenon, particularly in China where in the past income
elasticity of demand has shown great oscillation from one year to the next. As a result of this revision, world oil demand growth is now projected to rise by 1.58 mb/d, or 0.04 mb/d lower than the previous 1.62 mb/d, to average 83.64 mb/d, indicating a y-o-y rise of 1.93%.
The regional breakdown shows a disappointing 0.35 mb/d or 0.7% rise in total OECD countries for an average of 49.81 mb/d. Within this group, North America will account for the major portion of growth, while OECD Pacific countries will make up for the remainder. In contrast, oil demand growth in Western Europe is expected to fall marginally on the back of disappointing rates of economic growth with GDP for the region once again being revised down to stand at 1.57%. Ongoing fuel oil substitution and possible impact of both oil prices and a weaker Euro have also contributed. Oil demand growth in the developing countries is projected to rise by
0.81 mb/d or 3.8% to average 22.19 mb/d, accounting for more than half of the expected total world oil demand growth. Most of DC growth is expected to originate in non-OECD Asia and Middle East whose combined growth should make up more than four-fifths of the region’s growth. Apparent demand growth in the Other Regions group was substantially revised down from last month. China’s disappointing apparent demand growth during the first half of 2005 combined with equally poor second-quarter growth in the FSU prompted this revision. Thus, Other Regions apparent demand is estimated to rise by 0.42 mb/d or 3.8% to average 11.64 mb/d, a downward revision of 0.1 mb/d from last month’s projection.
Oil demand in OECD countries is projected to rise by 0.35 mb/d or 0.7% to average 49.81 mb/d for the present year. Oil demand growth was revised up from last month as preliminary data for the second quarter of the year indicates higher growth rates in Western Europe and OECD Pacific. Oil consumption in the North American region seems not to have met expectations. Mexico, which accounts for less than 10% of total North American demand, has shown consistent solid growth rates of 2.6% in the first quarter of 2005 and 5.7% in the second,
while Canada — with another 10% of the region’s demand — saw its consumption grow by 1.7% in the first quarter of 2005 but then drop 1.2% in the second. The USA, which at 80% accounts for the lion’s share of North America’s demand, presents a puzzling situation at this time. According to the latest figures released by the EIA in its Weekly Status Report, product supply for the period January–July 2005 averaged 20.54 mb/d, for a drop of 0.35% or 0.07 mb/d with respect to the same period last year. This indicates that product demand in the first seven months of the year contracted, and casts doubt on the already meagre growth projection for North
America and the OECD region. But a closer look at the EIA figures shows positive growth rates in major product categories such as finished motor gasoline, distillate fuel oil and kerosene, while the biggest fall is in the category Other Oils. As these figures are expected to see revisions in the coming month, we have decided to maintain our current assessment on USA growth which is in line with the expected healthy economic expansion of 3.4% for the region.
Developing Countries oil demand is forecast to rise by 0.81 mb/d or 3.8% to average 22.19 mb/d for the whole of 2005. This month’s forecast demand growth has been marginally revised down to reflect projected lower GDP rates in two sub-regions Middle East and Africa. However, GDP growth rates for non-OECD Asia (excluding China) and Latin America were marginally revised up. The economic impact of sustained high international oil
prices on these countries and on the consumption of oil and petroleum products is not yet clear. Nonetheless, what is well documented is the recent implementation of a series of measure designed to alleviate the negative effects of oil prices on their trade balance as well as their national budgets. Countries in Asia have recently lowered or fully phased out subsidies, hiked domestic retail product prices and started to seek ways to encourage new transport technology as well as fuel substitution. It is still too early to see the impact of such measures on the consumption of oil and petroleum products on these countries due to the time-lag. Nevertheless, we believe that consumption patterns in the countries where these measures have been adopted
might become leading indicators and therefore should be followed closely. We reiterate once more the increasing risk that developing countries pose to any demand assessment due to the quality, availability and timeliness of the data. Therefore, extreme cautious must be exercised as 0.81 mb/d, or more than half of the total 1.58 mb/d of global consumption growth for 2005, is expected to originate in this group. Very preliminary figures for the first and second quarters of 2005, which show 4.2% and 3.1% y-o-y growth, seem to substantiate the projections for the full year.
Apparent demand growth in the Other Regions group for the present year is projected at 0.42 mb/d or 3.8% to average 11.64 mb/d, which is significantly lower than the 0.53 mb/d or 4.7% forecast in the last MOMR. China accounted for the bulk of the downward revision to demand growth within this group but apparent demand growth was also lowered in the FSU due to a considerable drop in second-quarter demand. China’s apparent demand for the period January-May 2005 seems to have grown by less than 1% compared to the same period of last year, a highly disappointing growth rate compared to the almost 20% growth seen in the first half
of 2004. Even more worrisome is the fall in China’s second quarter 2005 apparent demand. The latest production and trade figures seem to indicate that apparent demand contracted by 0.06 mb/d or 0.9% during the second quarter of the year. The drop in demand seems to be rooted in the sharp decline in petroleum product imports, especially diesel and LPG. A number of reasons could explain the meagre growth in demand in China during the first half of the year, such as the Chinese government’s policy to limit the prices of gasoline and gasoil in an effort to shield the economy from high international oil prices. The outcome of such a policy has been a decline in product imports as Chinese suppliers find the burden of buying products at international prices
and selling them at the mandatory at lower domestic prices unbearable. The jump in gasoil demand following power shortages, especially in the second quarter of last year, seems to have been a one-time phenomenon. Contrary to expectations early on this year, there are no indications of a recurrence in shortages this year. It is important to reiterate that China’s apparent demand growth for the first half of 2004 was remarkable and it is not likely that the first half of this year saw similarly substantial high growth. Nonetheless, we still expect to see healthy growth rates during the second half of this year due to healthy robust economic growth and possibly
diminished use of inventories.
Forecast for 2006
Average world oil demand is projected to grow by 1.57 mb/d or 1.9% to average 85.21 mb/d for 2006. This slight upward revision from last month’s forecast is due to a more optimistic view of the world economy for the coming year. World’s GDP growth is now projected to rise by close to 4.0% next year with developing countries’ economies showing better rates of economic expansion than previously projected. Oil consumption is expected to rise in all major regions with the sole exception of Other Europe where demand will remain almost flat. North America, especially the USA, will contribute the bulk of demand growth within the OECD countries but some growth is expected in Western Europe and the OECD Pacific. China will make up about one-fourth of total world oil demand growth in 2006. Demand is projected to rise in each quarter on a y-o-y basis. Nonetheless, typical
seasonality is expected to remain to some extent. Thus, absolute demand of 83.33 mb/d in the second quarter of 2006 will drop by 2 mb/d with respect to the first three months of that year. Total world oil demand will then recover by 1.5 mb/d to average 84.9 mb/d in the third quarter of 2006 and increase a further 2.5 mb/d to average 87.3 mb/d in the fourth. This preliminary assessment is subject to further adjustment as new information becomes available on key factors, such as the outlook for economic growth, weather conditions, unforeseen geopolitical events, and variations in crude and product prices.