Oil Market Highlights - Nov 07

Source: OPEC_RP071101 11/15/2007, Location: Europe

The OPEC Reference Basket price remained volatile in October, as US dollar weakness inspired fund buying in the futures market with the Mideast geopolitics adding to market bullishness. Profit-taking and concern over slower economy growth provided some cap on prices. The OPEC Reference Basket set a monthly high of $79.36/b, representing a gain of $5.18 or almost 7% over the previous month. The upward trend continued into November as further dollar declines encouraged speculative buying and prices reached a record high of $90.71/b on 7 November. However, economic concerns and lower demand growth expectations helped to ease supply fears and the Basket fell to $86.57 on 14 November.

World economic growth in 2007 was revised up by 0.1 percentage points (pp) to 5.2%, mainly on upward revisions to growth in USA (+0.2 pp) and China (+0.2 pp). In the US, the 3.9% growth in third quarter GDP — the fastest pace since the first quarter of last year — is not expected to be matched in the next two quarters. The deepening housing slump and continued banking concerns induced the Fed to further lower interest rates and there is widespread speculation that another cut could be seen in December. Both Euro-zone and Japanese growth in 3Q were surprisingly strong despite the soaring euro and a troubled construction sector in Japan, but slowdowns in Q4 are underway. China continues its investment-led growth but rising inflation is an increasing challenge. For 2008, the global growth forecast is unchanged at 4.9%. While the forecast for all OECD regions has been revised down somewhat, this is counterbalanced by upward revisions for Africa and Latin America.

The world oil demand growth for 2007 is forecast at 1.2 mb/d or 1.4%, representing a downward revision of 0.1 mb/d from the previous month. US oil consumption growth in the first ten months is estimated at just 40,000 b/d or 0.2% y-o-y, representing a downward revision of 0.16 mb/d from the previous estimate. Late winter in North America along with the high price of transport fuel appears to be reducing regional oil consumption in the fourth quarter, leading to a downward revision of 0.1 mb/d for that quarter. Although China increased product prices by around 10%, this new price hike is not expected to have a major impact on total Chinese oil demand. In 2008, world oil demand is forecast to grow by 1.3 mb/d to average 87.0 mb/d, representing a downward revision of 30,000 b/d from last month.

Non-OPEC supply growth in 2007 has been revised down slightly to stand at 800,000 b/d over the previous year. The adjustments were mainly due to downward revisions to the US, Norway, UK and Brazil in the third and fourth quarters. For 2008, the forecast for non-OPEC supply growth was revised down slightly to now stand at 1.0 mb/d as some of the 2007 revisions have been extended into 2008 and as more data on project startups and ramp-ups has become available. Growth in OPEC NGLs and non-conventional oils for 2007 and 2008 was left broadly unchanged at 0.33 mb/d and 0.52 mb/d respectively. In October, OPEC crude oil production averaged 30.99 mb/d, a rise of around 270,000 b/d from the previous month, as production from Saudi Arabia showed a significant increase of 110,000 b/d, with minor declines in production from Nigeria and Iran.

In the past two months, crude prices outstripped product prices and undermined refinery margins across the globe, especially for light sweet benchmark crudes. The current relatively weak product market sentiment may change as we approach the peak demand season for heating oil, which could lift product prices and refinery margins. However, due to relatively comfortable middle distillate stocks, the market is expected to be driven by factors other than product price movements, unless we face a severe winter in the Western Hemisphere or another round of unplanned refinery outages in the USA.

OPEC spot fixtures increased by 7% in October from the previous month to average 12.74 mb/d, while OPEC sailings experienced a slight decline to average 23.14 mb/d. Arrivals remained steady around the world with US arrivals falling a minor 70,000 b/d in October. The VLCC market improved slightly as winter cargoes began to appear in the market. On the Middle East/eastbound and westbound routes, rates increased 3% although higher bunker fuel prices capped the rise. Clean tanker freight rates were in a better position as tonnage demand increased and availability declined.

Preliminary data show that OECD total net oil imports decreased 0.8 mb/d in September on the back of lower net crude oil imports, while product imports experienced a gain of 194,000 b/d from the previous month. US crude imports fell 350,000 b/d in October to average around 9.6 mb/d and US product imports increased by 340,000 b/d on the back of lower refinery runs. In October, Japan’s net oil imports rose 300,000 b/d, driven by higher crude imports in anticipation of the emergence of refineries from scheduled turnarounds. China’s crude oil imports remained steady in September to average 3.3 mb/d while product imports rose 11%. India’s net oil imports dropped 15% in September due to a fall in crude oil imports, indicating a y-o-y decline of 5%.

US commercial oil stocks dropped for the third consecutive month to hit 1,014 mb, representing a decline of 7.4 mb from the previous month but remain 7 mb or 1% above the five-year average. Crude oil stocks continued their downward trend, falling 9 mb to stand at 312 mb, the lowest level since September 2005 but still 2% above the five-year average. Product stocks rose 1.7 mb, driven by gasoline which, despite a build of 3.8 mb, remained below the five-year average. In EU-15 and Norway, total oil stocks plunged 16 mb to 1,122 mb, the lowest since April 2005, but remained 11 mb above the five-year average with crude oil accounting for 6 mb and products for 5 mb. Japan’s commercial oil stocks fell more than 16 mb in September to hit an 18-month low, with crude oil stock-draws representing more than 80% but preliminary data for October show that total oil stocks have recovered moderately.

The demand for OPEC crude in 2007 is expected to average 31.1 mb/d, an increase of 0.1 mb/d over the previous year. In 2008, the demand for OPEC crude is expected to average 30.8 mb/d, a decline of 0.2 mb/d.

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