The OPEC Reference Basket eased in August as the weaker economy outlook was seen denting demand. Higher OPEC exports calmed market sentiment while China’s lower imports triggered concern over demand growth. However, geopolitical conflicts in the Caucasus contributed some bullish sentiment to the market. The Basket fell $18.81/b or more than 14% in August, declining sharply from the record levels reached in July. In the first week of September, the Basket continued to retreat amid the recovery of the US dollar to a one-year high, the worsening economic prospects and minimal damages by Hurricane Gustav. The approach of Tropical Storm Ike delayed recovery from the previous storm. The Basket continued to fall, pressured further by the fallout from the Lehman Brothers bankruptcy, reaching $91.35/b by mid-month.
The world economy is estimated to grow at 3.9% this year, unchanged from last month, while the forecast for 2009 is 0.1% lower at 3.7%, due to revisions for both OECD and Developing Countries as spillovers from the US slowdown spread to other regions. The forecast may be subject to downside revision due to the mounting financial risks to growth as witnessed by the bankruptcy filing by Lehman Brothers, the fourth largest investment bank and its possible consequences for the US and global fiancial system. The US government had earlier also taken over control of the troubled mortgage giants Fannie Mae and Freddie Mac, whose downfall may have posed a systemic risk. Subprime related financial losses and writedowns have risen to over $510 bn. Within the OECD, Euro-zone growth was revised down 0.1pp in both 2008 and 2009 to 1.3% and 1.0%, and Japanese growth was trimmed to 0.8% (down 0.2%) and 1.0% (down 0.1%). The possibility of a technical recession in both regions cannot be dismissed. US growth at 1.8% (up 0.2%) in 2008 and 1.4% (up 0.1%) in 2009 is now expected to exceed Japanese and Euro-zone growth. This prospect has lent further support to the US dollar which rose to a one-year high versus the euro, but the US currency gave away some of these gains following the latest plight at Lehman Brothers. Developing Countries’ growth is unchanged this year at 5.8%, and is 0.1% down to 5.5% in 2009, due to downward revisions for Latin America, Africa, and to a lesser extent Asia.
OECD oil demand showed a further decline in August due to a steep fall in the US oil demand. This declined by 0.8 mb/d y-o-y in August resulting from slow economy and high retail prices. In contrast, summer oil demand growth of 4% in non- OECD countries, mainly China, Middle East and Asia, offset the decline in OECD oil demand. However, with the most recent data showing an unexpectedly strong decline in oil demand in North America, the total world demand growth forecast has been revised down by 0.1 mb/d. Thus, world oil demand is forecast to grow by 0.9 mb/d in 2008 to average 86.8 mb/d. For 2009, world oil demand is forecast to grow by 0.9 mb/d to average 87.7 mb/d, unchanged from the last report. Non-OECD countries’ oil demand growth of 1.2 mb/d will account for all of the world oil demand growth next year. The transport sector will see the largest oil demand growth in 2009. One of the factors that might take a toll on next year’s oil demand growth is the removal of price subsidies in Developing Countries.
Non-OPEC oil supply in 2008 is expected to average 49.9 mb/d, representing an increase of 510 tb/d over the previous year, indicating a downward revision of 70 tb/d from the last assessment. The estimate for the USA may be subject to further revisions as the full impact of the recent hurricanes is still being assessed. Preliminary data for the month of August put global supply at around 86.3 mb/d, representing growth of around 3% y-o-y. In 2009, non-OPEC oil supply is expected to average 50.81 mb/d, representing an increase of 880 tb/d over the previous year. OPEC NGLs and non conventionals are expected to reach 4.9 mb/d in 2008 and 5.5 mb/d in 2009. In August, OPEC production stood at 32.5 mb/d, broadly unchanged from the previous month.
Precautionary refinery shutdowns in the US Gulf Coast combined with the continuation of gasoline stock-draws boosted product prices and refining margins in the Atlantic Basin over the last few weeks. The recent sharp fall of crude prices also contributed to positive developments in refining economics. The current bullish sentiment in product markets may continue in the next few weeks and provide support for both product and crude oil prices. However, it is still too soon to say that product markets would be able to overcome the overall bearish trends and assume market leadership in the coming months.
OPEC spot fixtures increased by 6% in August from the previous month to average close to 13 mb/d, supported by increases outside the Middle East. OPEC sailings were steady averaging 23.3 mb/d. Arrivals in the US declined last month in line with lower US crude imports. Spot freight rates for crude oil tankers declined sharply by 34% in August mainly due to the very weak VLCC and Suezmax markets. Product tanker freight rates were steady in August with a marginal 1% increase due to the strong East of Suez market.
US commercial oil stocks dropped 5 mb in August to stand at around 983 mb, keeping the deficit with the five-year average at 28 mb or 3%. The draw was the result of an increase of 4.5 mb in crude oil and a drop of 9.6 mb in product stocks. However, due to weaker demand, stocks remained comfortable in terms of forward cover. Gasoline stocks lost a substantial 15 mb on the back of lower imports, triggered by anticipated disruptions due to hurricanes. In EU-15 plus Norway, total oil inventories fell 11 mb and moved below the five-year average for the first time so far this year. Japan’s commercial oil stocks recovered sharply in July to move above 180 mb for the first time since last November. Preliminary data show a further increase in August.
The demand for OPEC crude in 2008 is expected to average 32.0 mb/d, a decline of 160 tb/d from the previous year. In 2009, the demand for OPEC crude is expected to average 31.3 mb/d, a decline of 670 tb/d.