Third-quarter data suggests that the US and the world economy were growing strongly before the impact of
hurricanes Katrina and Rita. The direct effect on the growth rate of the US economy in 2005 is now expected to
be a reduction of only 0.1% and next year will see substantial spending on rebuilding. The US GDP growth
forecast for 2005 has been raised to 3.5% and the forecast for 2006 to 3.1%. The major concern of financial
markets has shifted from growth to inflation, as we have highlighted in previous reports. The prospect of higher
headline and core inflation suggests that 2006 will see moves to tighten monetary policies in the USA, Europe
and Asia.
Following excellent second-quarter data, the Japanese growth forecast for 2005 has been revised up to 2.1%.
Further steady growth of 1.8% is expected in 2006. There has been no change in the forecast for the Euro-zone
which is expected to grow by 1.1% in 2005 and by 1.5% next year. Growth forecasts for the Developing
Countries have been revised up to 5.4% in 2005 and 5.0% in 2006. Africa in particular looks set to benefit from
the strong growth of oil exporting economies.
The forecast growth rate for the world economy in 2005 has been increased to 4.2%, followed by growth of 4.0%
next year. The cautious outlook for 2006 reflects a balance between the positive influence of improving business
confidence, trade and manufacturing indicators and the ongoing impact of high energy prices on real incomes,
especially in Asian countries where fuel subsidies have been reduced. Much will also depend on the resilience
of the US economy in the face of rising interest rates since lower US demand might also slow exports and
investment in China and other Asian economies.
The OPEC Reference Basket in September experienced a volatile month due to mixed signals. Hurricane
Katrina revived fears of a replay of last year’s impact of Hurricane Ivan on oil operations in the Gulf of Mexico.
However, the IEA’s emergency response of strategic crude and product stocks together with OPEC’s prompt
provision of oil supplies helped to ease the market. The Basket average rose only 6¢ for the month to $57.82/b.
The Basket continued to slip in October with the average for the first half of the month at $55.55/b, representing
a loss of $2.33 or 4% from the previous monthly average, and stood at $54.49/b on 14 October.
Sharp refinery outages in the USA as a result of the hurricanes Katrina and Rita, along with the drop in natural
gas output from the US Gulf Coast and fears of product shortfalls in the winter season, have lifted product prices
and caused refinery margins of different benchmark crudes to surge sharply in September. Due to the recent
slowdown in demand, particularly in the USA, and technical sell-offs, the product markets along with the crude oil
market have lost part of their strength, but product markets are still fundamentally short and prices could rebound
in the next few weeks. As about 1.8 mb/d of US refinery utilization is still off-line, and because of the recent
ongoing strike in France, the current short-fall in the product markets deepens, providing further support for
product and crude oil prices.
Total OPEC spot chartering surged by almost 2.3 mb/d or 18% to average 14.8 mb/d. Middle Eastern countries
were the main contributors to the growth with 1.9 mb/d or 84%, coming essentially from the westbound fixtures,
which increased by 1 mb/d or 90% compared to the previous month. Sailings from the OPEC area fell by 0.72
mb/d to 24.7 mb/d, but remained 1.7 mb/d higher than a year earlier. The tanker market recovered from its
summer lull with spot freight rates for crude oil showing some improvements ahead of winter, while freight rates
for products increased significantly, especially in the Caribbean and the Atlantic Basin, where they hit their
highest levels since late 2000 as a result of a spike in bookings following hurricanes Katrina and Rita.
While persistently high oil prices have begun to erode demand, on the positive side, the economic outlook for
the present year remains healthy at 4.2%. Some of the market views vindicated by the substantial 2.6% drop in
US gasoline consumption in the latest EIA figures, based on the last four-week average, should also take a look
at the yearly trend for gasoline demand for the first eight months of this year, which was 9.15 mb/d compared to
9.11 mb/d in the same period last year. Moreover, any prediction based solely on the last four-week average
might be misleading, especially if the period encompasses the post-Katrina episode. World oil demand growth
for the present year has been revised down by 0.2 mb/d and is now estimated at 1.2 mb/d, representing 1.4 %
y-o-y growth, for a yearly average of 83.3 mb/d. As for 2006, global oil demand growth is projected to stand
close to 1.5 mb/d or 1.8 % for a yearly average of 84.7 mb/d.
Non-OPEC supply in 2005 is expected to increase 0.49 mb/d over the previous year, following a downward
revision of 113,000 b/d to last month’s figures. Including OPEC NGLs and non-conventional oils, non-OPEC
output this year should increase 0.7 mb/d over 2004. On a quarterly basis, non-OPEC supply has been revised
down in the third and fourth quarter by 127,000 b/d and 331,000 b/d respectively. Negative revisions to US Gulf
of Mexico and UK production account for the bulk of the adjustments partly offset by upward revisions in
Australia and in several Developing Countries. In 2006, non- OPEC oil supply is expected to increase 1.27 mb/d
over the current year, following an upward revision of 90,000 b/d from last month’s report. Including OPEC NGLs
and non-conventional oils, non-OPEC supply is likely to increase 1.6 mb/d from 2005. September OPEC output
is estimated at 30.34 mb/d.
US commercial oil inventories (total crude and petroleum products excluding SPR) during 2-30 September
showed a draw of 4.7 mb or 0.17 mb/d to 1,004.90 mb. This level was 3.4% higher than last year’s figure and
2% above the five-year average. Total oil inventories in Eur-16 (EU plus Norway) in September continued to
show builds for the third consecutive month, increasing by 2.9 mb or 0.10 mb/d to stand at 1,136.0 mb. This level
is 37.1 mb or 3.4% higher than that registered a year ago. Total oil inventories in Japan showed a further
moderate build in August, rising by 4.2 mb or 0.14 mb/d to stand at 190.9 mb, a level not seen since November
2004.
The supply/demand balance for 2005 has been revised down to reflect lower demand and lower supply
expectations. Demand for OPEC crude in 2005 (a-b) is now forecast at 28.7 mb/d, an increase of 0.5 mb/d from
2004 but 200,000 b/d lower than projected earlier. The crude required for the fourth quarter of 2005 is now
estimated to be 30 mb/d, which is 300,000 b/d lower than before as well as the current OPEC crude production
(30.3 mb/d). In terms of OPEC capacity, taking into account the supply/demand balance, the resulting required
OPEC crude production levels and projected production capacity, OPEC’s spare capacity is now estimated to
average around 8.5% in the fourth quarter of 2005, compared to 4.9% in the same period of 2004. For 2006, the
demand for OPEC crude is expected to average 28.5 mb/d, a downward revision of around 400,000 b/d versus
last month’s report. The quarterly distribution shows that demand for OPEC crude is now expected to be 29.7
mb/d in the first quarter, 27.7 mb/d in the second, 28 mb/d in the third and 28.8 mb/d in the fourth.
