Continued stock overhang as oil demand remains sluggish
During the first half of the year, global economic growth exceeded expectations. The recovery was led by a strong pick up in both manufacturing and international trade. In China, growth was higher than expected, especially in the first quarter, fuelled by the huge fiscal stimulus, with China assuming a greater role as an engine of regional and global growth. The recovery in OECD countries, in contrast, was more modest and relied primarily on continued monetary and fiscal support, creating the appearance of a two-speed world.
Despite the better-than-expected economic performance, the recovery in oil demand in the first half of the year remained relatively modest. Global oil demand rose by 0.7 mb/d and 1.3 mb/d during the first and second quarter, respectively, but from the extremely low base of the previous year. Looking to the second half, the pace of economic growth is projected to slow, not only in OECD but also across most emerging and developing markets indicating that oil demand growth will remain moderate.
The downshift in economic growth in the second half of 2010 is expected as countries slowly phase out fiscal stimulus. In major OECD countries, growth is still some way from becoming self-sustaining. As a result, monetary policy should remain very accommodative for some time, but a continued expansionary fiscal policy is less of an option given the high and rising debt/GDP ratios. In contrast, clear signs of overheating have become apparent in some major emerging markets, and governments have already begun to tighten monetary policies. The result is that growth in both OECD and emerging markets is set to slow in the second half of the year.
Oil demand reflects this downshift. Preliminary July figures show only moderate demand growth in two key consumer countries. During the peak of the driving season, US gasoline demand in July reached only 9.4 mb/d — around 200 tb/d less than pre-recession levels. This has been due to lower vehicle miles travelled, which may reflect the still high levels of unemployment in the US. Preliminary data for Chinese oil demand for July also indicates a slowdown in the pace of growth to 0.4 mb/d from 0.6 mb/d in the first months of this year as government policies to avoid overheating in the economy began to take hold.
Given the projected slowdown in the world economy in the second half of this year, there is need to be cautious about forecasting oil demand for the remainder of 2010. Moreover, other factors such as government policies could impact the growth in demand. For example, the Chinese government’s recently announced plans aimed at fulfilling energy efficiency targets set in the five-year plan by end-2010 may impact energy and oil demand for the rest of the year. For the whole year, oil demand growth is expected at around 1 mb/d, lower than the prerecession annual average of around 1.7 mb/d (see Graph 1).
Next year, the situation is not expected to be much different. In fact, world economic growth is projected to be lower next year than in the current year — at 3.7% versus 3.9% — as fiscal and monetary tightening reduce the unprecedented support extended over the previous two years. Thus, continued slow growth in oil demand is expected in 2011 with the forecast averaging around 1.0 mb/d — a level of growth that appears more realistic going forward, given the large uncertainties. Indeed, recent projections assuming oil demand growth will return to pre-recession levels over the medium-term would appear to be exaggerated.
The modest recovery in demand coupled with higher-than-expected oil supply has led to a further build in stocks in recent months. In the first quarter, a contra-seasonal build in OECD commercial oil stocks was observed, while in the second the build was much higher than the normal seasonal average. Additionally, preliminary data for July indicating a further build in stocks supports the present trend. This has led to an overhang in OECD inventories approaching 130 mb in July (see Graph 2). Taking into account floating storage, observable excess supplies amounted to more than 210 mb in July.
Given the current supply/demand outlook, the overhang in inventories is not expected to change significantly in the coming quarters. This highlights the need for increased efforts to strengthen market fundamentals.
