World Oil Demand - Feb 07

Source: OPEC_RP070201 2/15/2007, Location: Europe

World oil demand in 2006
Warm weather in December negatively affected global oil demand, although December oil demand was stronger than in the previous month. OECD countries showed the largest decline inoil demand in December, due to the warm weather. The impact on oil demand for non-OECD countries was not as strong as that of the OECD countries. In fact, India and the Middle East oildemand were stronger than expected, which offset the decline in OECD oil demand. Total y-o-y world oil demand growth for 2006 is estimated at 0.8 mb/d or 1.0%, representing only minorchanges from the last MOMR. Most of the decline in OECD oil demand was a result of fuel switching from fuel oil to natural gas.

Estimated regional oil demand, year-to-date
North America is the key demand factor, especially when the weather is concerned. According to the EIA weekly, US oil demand declined by 0.76 mb/d or 3.6% in December compared to the same period in the previous year. This decline was mostlyin fuel and heating oil, which are the main two products consumed during winter. As far as the total year isconcerned, US oil demand declined by 0.2 mb/d in 2006. As a result of fuel switching, the main decline came fromwas fuel oil, which dropped 0.25 mb/d in 2006. Also kerosene-jet fuel demand declined by 0.06 mb/d in 2006. There was a mild increase of 0.8% in motor gasoline but this did not offset the overall decline. As a result, North America’s y-o-y fourth-quarter oil demand was revised down by 0.09 mb/d,showing a minor decline of 0.04 mb/d to average 25.44 mb/d.

OECD Europe
European auto owners benefited from heavily-subsidized biofuel. The Swedish government has a plan to have more than half of driven vehicles equipped with a biofuel-operated engine.According to Statoil, sales of E85 biofuel increased by 270% in 2006. Along with low transport fuel demand, the warm winter reduced the demand for heating oil; hence, the OECD Europey-o-y fourth quarter is not following a normal up cycle growth, but rather is estimated to show a minor decline of 0.03 mb/d to average 15.66 mb/d.

OECD Pacific
Although crude runs were low, South Korea took advantage of low oil prices, as the country’s oil imports rose by 3.7% in December with yearly average growth at 5.5%. According togovernmental data, Japan’s y-o-y oil imports grew by 18% in December; however, total oil imports for 2006 were flat. Slow economic activities, the warm winter, fuel switching, lowtransport fuel demand and high utilization of Japanese nuclear power plants were the main factors behind sluggish oil demand in Japan last year. Japan’s oil demand for December dropped by17.3%, while for the full year demand declined by 2.5% from 2005. The products which declined the most in 2006 were kerosene and gasoil while fell by 6.4% and 5.4% respectively. Both high oil prices and bad weather in the peak of the driving season in July and August dampened gasoline demand by 1.1% in 2006. OECD Pacific demand in the fourth quarter is estimated to have fallen 0.02 mb/d y-o-y. In total, OECD fourth-quarter oil demand growth was revised down by 0.1 mb/d to show a y-o-y decline of 0.09 mb/d.

Developing Countries
India’s oil demand reached 2.85 mb/d, in December, representing a gain of 0.32 mb/d over the previous month. Oil demand growth in December of 7.26% was the highest in twelve months.Hence, India’s oil demand surged by 2.9% to average 2.6 mb/d in 2006. The boom in new car sales put gasoline demand at a high of 5.69% y-o-y. In contrast, fuel oil was negatively affectedby the fuel switching in power plants and showed a decline of almost 6% y-o-y. Diesel demand grew by 5.13% for the year as a result of strong agricultural and trucking activities inIndia.

The healthy oil demand growth in the Middle East came as expected. Fourth-quarter y-o-y oil demand growth is estimated at 0.35 mb/d to average 6.2 mb/d for the region. As a result ofhigher-than-expected oil demand in India, the DCs oil demand in the fourth quarter was revised up by 0.18 mb/d to average 23.30 mb/d, representing growth of 0.82 mb/d y-o-y.

Other Regions
China’s y-o-y crude imports in 2006 rose slightly above 17% or 0.51 mb/d compared to a 3.6% decline in 2005. Some of China’s 2006 oil imports which averaged 2.68 mb/d were used to fill thenew strategic storage in Zhenhai which was commissioned in late 2006 and has a capacity of 32.7 mb. China’s oil demand growth in the fourth quarter is expected to reach 0.28 mb/d y-o-yto average 6.83 mb/d. Strong Chinese economic activities along with the ambitious governmental plan to develop the rural areas were the main factors behind China’s stronger-than-expected oildemand growth for 2006, which yielded healthy oil demand growth reaching 0.6 mb/d to average 7.12 mb/d in 2006. December Chinese gasoline demand grew by 6% to meet the large increase in new car sales, totaling 7.2 million units in 2006. The rural area development has affected diesel demand, which grew by 5% in December. The warm winter has helped oil demand in China via the increase in agricultural and construction activities. One product that experienced a strong decline of 27% as a result of the use of alternative energy is fuel oil.

Forecast for 2007 demand
Cold winter weather finally returned, especially in North America. Temperatures dropped in the third week of January to below normal in the US Northeast, the main heating oil consuming region. As a result of the weaker-than-expected oil demand in the OECD Pacific and China, oil demand growth in the first quarter of 2007 was revised down by 0.07 mb/d to 1.06 mb/d. World oil demand growth for 2007 is forecast to show an increase of 1.2 mb/d or 1.5%, broadly unchanged from the last MOMR estimate.

In the third week of January, EIA inventory data showed a drop in heating oil stocks. It is expected that heating oil inventories will decline, pending the continuation of the cold weather, but not to a level that sustains normal product demand in the USA.

The Clean Energy Act on was passed in the USA in January. The new bill will establish a "clean energy fund" which will create incentives for and investments in technologies related to bothrenewable sources, such as wind and solar energy power generation facilities, and energy efficiency in buildings, appliances and vehicles.

Asia’s strong oil consumption has shifted the oil demand growth pattern. Asia’s economic boom is demanding higher oil growth than the USA. OECD countries are no longer the driving factorsbehind oil demand growth, as this role has shifted to Developing Countries. China, India and the Middle East are the main areas driving oil demand growth this year. This important switch is putting more weight on the second and third quarters as far as consumption seasonality is concerned.

Alternative Fuels
Natural gas (NG) has been the largest alternative energy to oil so far. The recent warm weather, which lessened the NG prices, made it feasible to power plants to fuel switch away from fuel oil. Recent trends in the USA showed a 30% decline in fuel oil because of the NG substitution. US politicians are gearing up to further support the heavily subsidized biofuel in order to minimize oil use. The country already has an ambitious plan to reduce gasoline consumption by 20% over 10 years via the use of alternative fuels such as cellulosic ethanol that is not made from food but non-food products such as grasses. The US will pursue this venture via the collaboration with other countries that are advanced in the bio-fuel business, such as Brazil. The US is already pushing for new alliances with various countries in the Americas to promote the use of biofuels. This new American venture is not limited to biofuels only, but is also extends to other types of alternative fuel such as solar, wind and nuclear.

China’s demand for coal is increasing; according to officials; the 2007 coal demand is estimated at 2.5 billion tonnes. The Chinese coal consumption is estimated to grow by more than 13% in comparison to the 2005 consumption. Expansion of China’s new coal-fueled power plants in the next three years will increase by 11% and will maintain the lion’s share of 70% in the total power sector; however, due to the high pollution in China, the country will close up smaller coal-fueled power plants, which supply 10% of total electricity. Another part of China’s strategy to reduce the use of oil is to boost the production of biofuel. According to local media, China’s plan is todevelop the use of biofuel in the rural areas in order to replace 10 mb of oil products by 2020.

In Europe, biofuel usage is on the rise. Swedish auto owners have received various benefits for using biofuel-operated vehicles. This special offer is expected to triple the consumption of biofuel in Sweden in 2007.

In North America, oil demand started the year with a decline due to the above-normal weather conditions. However, to some degree the picture changed in the last week of January when the US Northeast experienced below-normal temperatures. Should the cold weather stay for the rest of the winter, then oil demand should come in as expected with high demand for both heating and fuel oil. North America’s oil demand in the first quarter of 2007 is forecast to grow by 0.2 mb/d y-o-y to average 25.32 mb/d. In Europe, not only has the warm winter had a negativeimpact on oil demand, but also transport fuel has failed to pick up. OECD Europe oil demand is expected to decline by 0.15 mb/d y-o-y in the first quarter of 2007. In total, the OECDcountries oil demand growth in the first quarter of 2007 is forecast at 0.1 mb/d y-o-y to average 50.27 mb/d.

Developing Countries
Developing Countries (DCs) are expected to maintain strong oil demand. DCs will account for 92% of the world oil demand growth in the first quarter. Economic growth of 7.8% in India isexpected to yield moderate growth of 2.6% for oil demand. Expected strong new car sales along with booming industrial and agricultural activities are expected to be the main drivers for oil demand growth.

Strong economic activities, including massive growth of petrochemical plants in the Middle East, are expected to increase demand for oil in 2007. The oil demand for the Middle East is expected to average 6.47 mb/d, representing y-o-y growth of 0.3 mb/d.

Other regions
Along with other concerns such as reducing pollution and increasing imported oil, China is trying to achieve the goal set in its five-year plan of reducing the use of energy by 20% by the end of this decade. China missed this goal in 2006 as oil demand grew by 9%. In 2007, China is expected to see strong oil demand growth at 6.25%. Expected strong economic activities are the impulse behind the strong demand for energy. However, low oil imports in January caused the apparentdemand to be lower than expected; hence, China’s first-quarter y-o-y oil demand growth was revised down by 0.06 mb/d to 0.3 mb/d. On a different note, the long-awaited Chinese oilstrategic storage is finally in operation. The Zhenhai strategic storage currently has 25 million barrels of oil or almost 75% of total designed capacity. The other 25% is estimated to be filled by May 2007. According to Chinese officials, there are three more strategic oil storages with acapacity of 69.2 mb that are under construction and the commissioning will take place in 2007 and 2008. Encouraged by both the cut in import tariffs and the cold weather, China’s diesel imports surged in January. As for gasoline, the newly discounted price should have a positive effect on gasoline demand in the short term.

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