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World Oil Demand – Nov 10

Source: OPEC_RP101106 11/11/2010, Location: Europe

World oil demand in 2010
Despite initial economic assessments that underestimated the second half of the year’s economic activities, oil demand is picking up in the third and fourth quarters. OECD oil demand beat expectations, resulting from better economic activities that have been boosted by various stimulus plans.

The upward risk mentioned in our earlier assessment materialized in the third quarter. North America, Europe, and the Pacific region have shown strength in oil consumption.

This has resulted not only from the summer driving season, but also from recovered industrial production activities. As a result, an additional 0.2 mb/d were added to the demand forecast of the OECD. A somewhat steady increase in OECD oil demand in the third quarter poses a signal of recovery for the economy. Another factor that will likely affect world oil demand is the weather in the fourth quarter. A swing in retail petroleum product prices could also affect consumption in the near future to some degree.

Although there is a stronger-than-expected recovery in OECD oil demand that has led to an upward revision in the second half, the non-OECD region came in as expected. Still, there is a risk in US oil usage, which depends upon to what degree the economy will march ahead and how cold the winter will be. Given the positive government intervention during the year, the world oil demand growth forecast was revised up by 0.19 mb/d to settle at 1.3 mb/d or 1.6%.

Alternative Fuels
The US biomass subsidy programme, which started in early November and pays farmers to experiment with energy, is costing the government around half a billion dollars. Although these government subsidies are helping the biofuel industry, the negative effect on the environment is vast and the programmes place a burden on the public budget. One slight advantage of the biomass programme is that it should relieve the demand for food-based biofuel by switching to non-food material.

Europe’s new Renewable Energy Directive (RED) mandates the use of renewable energy to account for 20% of total energy use by 2020. However, this mandate raises the question whether the continent can meet such an aggressive move. In the meantime, Germany approved its own mandate to increase the country’s bioethanol blend into gasoline to 10%, up from 5%.

OECD biofuel mandates negatively affect both South America’s and Asia’s environment as most of the supply is imported from these two regions. Deforestation is a major consequence resulting from the biofuel industry.

OECD - North America
US industrial activity put pressure on industrial fuel consumption in the third quarter. An additional 7.7% of distillate fuel was consumed in the third quarter followed by an increase in gasoline demand by 1.2% resulting from seasonal summer driving. This strong growth is partly attributed to an improved economy but also to the low base line of last year. The US has announced another new stimulus plan which will positively affect the country’s oil usage in the next six months.

October weekly data indicated a slowdown in the usage of energy with contractions in some industrial fuel products such as residual fuel oil and propane/propylene; however, October has a low seasonality for energy usage. Nevertheless, October oil consumption achieved minor y-o-y growth. Hence, fourth quarter oil demand is anticipated to achieve fewer y-o-y changes than the third quarter. As in previous reports, the preliminary character of this data requires caution as to whether these indications will also remain after monthly data becomes available. Economic impulses during the year have pushed the country’s oil demand to the plus side by less than 2% and this expectation will last until the year end.

Year-to-date, 2010 displayed an increasing trend for US oil consumption, following a disappointing first quarter y-o-y contraction, mainly due to declining gasoline and weak distillate demand. However, demand rebounded later, resulting mainly from a better economy and a low baseline. New government stimulus plans will further call for more oil demand in the near future.

Based on almost 10 months of data from 2010, and coming from a low baseline, US oil consumption shows growth of 2% or 0.3 mb/d compared to the same period last year. Unusual signs for the period to date in 2010 are the extremely low gasoline growth of 0.3%, the relatively weak distillate expansion, shrinkage in propane/propylene usage and flat residual fuel oil use. It remains to be seen whether the effects of the newly adopted stimulus plan will stimulate the economy.

New US vehicle sales in October increased sharply, while growth in industrial production is flat or declining since May of this year. New truck sales in the US increased by 23% as a sign of a recovering economy. Auto sales in October were the highest since August of last year. The US auto market experienced a devastating setback in the past two years as the financial crises hammered the country’s economy. Nevertheless, a recovery began with the help of various government stimulus plans. This new strength in the auto industry will positively affect gasoline consumption in the fourth quarter.

Mexican September figures were disappointing, and declines were highest for residual fuel oil used in power plants. The country’s September oil demand declined by 90 tb/d y-o-y to average 2.0 mb/d. Due to a slow economy, Mexico’s oil demand has been on the decline since July and is expected to achieve slight growth of less than 1% for the year.

In Canada, oil demand has been on a strong growth trend since February; however this trend was interrupted in August with a sharp decline in jet/kerosene, which led to minor overall growth. The country’s total oil demand growth in August managed to rise by only 19 tb/d. Given the slowdown in the US economy, North American oil demand is expected to grow by only 0.1 mb/d in the fourth quarter. Nevertheless, total yearly growth in North America is expected to exceed 350 tb/d y-o-y in 2010.

OECD – Europe
September European oil demand indicated the third consecutive growth in oil consumption for the first time in almost 2 years. Nevertheless, debts in several European economies and continued application of rigorous state tax policies on oil are some of the factors which are imposing additional decline on European oil consumption. The European Big Four oil demand increased in September by 0.1 mb/d, compared to 0.4 mb/d a month earlier. Stronger distillate demand in Germany and France as a result of increased industrial production was the main reason for the recovery, while transportation fuels are still on the decline.

During September, French oil consumption was up by 2%, while Italian oil consumption was down by 1%. For France, October is expected to be weak as a result of the massive strikes in the country, which lasted for most of the month. The massive rebound in the continent’s oil demand came mainly as a result of the strong recovery in Germany’s energy consumption.

OECD Europe total contraction in oil demand is expected to be less than previously forecast; hence, an upward revision of 0.1 mb/d was added to show an annual decline of 0.2 mb/d in 2010.

OECD – Pacific
Japanese oil demand has been on the decline for the past few years and is expected to keep the same trend despite this year’s positive growth. Hence, the country has been dismantling excess refining capacity and is embarking on cutting another 1.3 mb/d of refining capacity in the next three years.

In Japan, the year 2010 seems to be developing into a recovery year showing a yearto- date increase of approximately 2.5% in oil consumption. Should this growth continue for the whole year, then it would be the first observed growth since 2005.

The petrochemical industry and thus naphtha, transportation fuels, direct crude burning and residual fuel oil are contributing to this noticeable growth with the help of a low baseline. Despite this positive performance, further development of Japanese oil consumption is heavily dependent upon the implementation of an additional economic stimulus plan, which is expected to take place in the remaining months of 2010.

South Korea, the second largest oil consumer in the OECD Pacific region, observed increases in the demand for all products, especially in gasoline, distillate and naphtha. South Korea’s oil demand has been fluctuating since the beginning of the year; however it stabilized to a certain degree in the beginning of the second quarter as the country’s economy has been pulling out of a prolonged stagnant period.

OECD Pacific oil demand is forecast to show minor growth of 70 tb/d in 2010, averaging 7.7 mb/d following a devastating decline last year.

Developing Countries
India’s oil demand marked the second month of decline, resulting from weak naphtha use. The country’s oil demand fell by 0.5% in September y-o-y. India used 4% less naphtha in September as a result of fuel switching to gas in the power plant sector. This shift has been seen throughout the year; hence, the country’s oil demand growth is weaker than earlier forecast by 60 tb/d. Furthermore, storms have been hammering the country’s agricultural sector in its high season.

This affected diesel consumption negatively in rural areas. Furthermore, national festivities in September have had an effect on the country’s oil usage during the month. Indian oil demand has not been stable this year as usual, due to several economic and natural factors. Nevertheless, the booming Indian economy will consume more energy not only in the short term, but also in the foreseeable future. The country’s oil demand will maintain growth despite the government decision to partially remove price subsidies from certain petroleum products.

Despite the slow growth in the third quarter, India’s fourth quarter oil demand is expected to perform better as several economic drivers are pushing the economy forward. India’s oil demand is forecast to grow by 80 tb/d in the fourth quarter y-o-y, averageing 3.3 mb/d.

Thailand oil demand dipped into the negative at the end of the summer resulting from slow use of not only industrial fuel but also transport fuel. Nevertheless, the country’s oil usage during the first three quarters shows slight growth of 2% as a result of higher demand of LPG from the manufacturing sector.

Given the unexpected slowdown in demand by power plants in India, Other Asia oil demand growth was revised slightly down to show growth of 0.2 mb/d or 1.9% y-o-y, averaging 10 mb/d.

September Saudi oil demand was pushed up by strong fuel oil consumption to achieve growth of 6.5% y-o-y. Following unexpectedly weak growth in August, September’s total oil consumption reached 2.2 mb/d.

Saudi oil demand in the third quarter is considered the high season because of the peak consumption of electricity. Summer driving consumed 8% more gasoline in September to average total gasoline demand at 412 tb/d. Yearto- date, the country’s oil usage grew by 7.3% or 135 tb/d. Two sectors that are highly affecting oil demand are transport and power plants.

This is affecting the gasoline, diesel, fuel oil and crude burning demand. Iran’s oil demand continued to fluctuate with September data showing a 1.4% y-o-y decline. This decline came as a result of a strong decrease in gasoline demand exceeding 18%. Year-to-date, the country’s gasoline dipped by 3.3% suppressing the total oil use down to lose 20 tb/d y-o-y.

Middle East oil demand growth is forecast at 0.18 mb/d in 2010. High demand in transport fuel again pushed Argentina’s oil demand up by 6% in August y-o-y. The country’s oil demand has been on the upward trend since September 2009, accumulating total oil demand growth of 1.7% in the first three quarters of the year. Brazil oil demand is highly active as well, achieving growth of 114 tb/d in the third quarter and this trend is expected to last until the year’s end. Economic activities, along with certain subsidies are inching up the country’s energy consumption.

Developing Countries’ oil demand growth is forecast at 0.6 mb/d y-o-y in 2010, averaging 26.6 mb/d. Other regions
China’s energy demand is booming despite government wishes to curb energy use. Furthermore, China has been actively filling its oil storage; hence apparent oil demand methodology must exclude all the oil that ends up in both strategic and commercial storage.

September data indicated strong growth in gasoline, reaching 8.3% y-o-y. New auto sales increased in China putting pressure on transport fuel demand. Other economic activities are pushing the country’s energy consumption sharply higher. Net oil import growth reached 32.7%, averaging 1.4 mb/d in September, leading to an apparent use of oil at 9.35 mb/d, recording growth of 9% y-o-y. Both transport and industrial sector activity led to an increase in oil demand. Due to this unexpectedly high oil demand, China’s oil demand growth forecast was revised up by 70 tb/d in 2010 to show growth of 0.53 mb/d. This massive increase in oil use came about despite government efforts to curb energy use.

China’s growth in oil demand was also affected by the 17% growth in auto sales in September. The country’s new car registration has been on a steep rise for a few years, which made China the largest auto market in the world.

Further challenges in relation to the development of the Chinese oil demand are already imposed government measures to reduce energy consumption, a fact which already caused undersupply in some petroleum products, especially diesel. Supplies of diesel during September 2010 were low, as many factories switched to diesel generators in order to manage imposed government power cuts. In addition, the situation has been worsened by lower refinery activity in August and September 2010, as a result of scheduled maintenance. Diesel supply shortages also affected several filling stations, which have been shut down, causing interruption of transportation.

Also, a carbon tax appears to be an emerging possibility in China. The National Development and Reform Commission and Ministry of Finance recently recommended an initial low tax rate, with the main task to create a regulatory and taxation structure in the energy sector.

Russian oil demand is back on track with a strong growth trend. The country’s oil demand during the first half of the year grew by 160 tb/d or 7.6% y-o-y resulting from high consumption of transport fuel, mainly gasoline. Given strong Russian oil demand, FSU oil consumption is forecast to show positive growth in 2010 totaling 60 tb/d or 1.6% y-o-y.

World oil demand in 2011
Optimism about the outlook for world economic activity next year is growing to some degree. However, the expected economic recovery is moving in slow motion and experiencing surprising turbulence.

The forecast for world oil demand in 2011 is affected mainly by GDP estimates. Furthermore, oil demand growth will be less than the current year due to the higher baseline.

Energy efficiency policies along with the use of biofuel will be affecting the use of oil worldwide. An enhanced picture of the OECD economic outlook is resulting in an upward revision for the region’s oil demand by 0.1 mb/d.

Hence, world oil demand growth is now forecast at 1.2 mb/d to average 86.9 mb/d. Petrochemical and transport sectors are dominant in world oil demand growth in 2011. The newly approved extra blend of biofuel in the US will slightly squeeze gasoline consumption once commissioned in the first quarter in 2011. The US has approved the E15 blend in gasoline for certain car models. This 15% ethanol blend was lobbied against by the auto industry for a while, as engines had never been tested to handle such a blend.

The non-OECD region is expected to keep the previous year’s oil demand growth pattern led by Chinese oil demand growth of 5.1%. The region is expected to consume 1.0 mb/d more oil than this year. Other Asia and the Middle East will contribute 0.2 mb/d each, while Latin America1.5 mb/d to total world oil demand growth.

The newly approved extra blend of biofuel in the US will slightly squeeze gasoline consumption once commissioned in the first quarter in 2011. The US has approved the E15 blend in gasoline for certain car models. This 15% ethanol blend was lobbied against by the auto industry for a while, as engines had never been tested to handle such a blend.

The non-OECD region is expected to keep the previous year’s oil demand growth pattern led by Chinese oil demand growth of 5.1%. The region is expected to consume 1.0 mb/d more oil than this year. Other Asia and the Middle East will contribute 0.2 mb/d each, while Latin America1.5 mb/d to total world oil demand growth.

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