Impressive data from the Euro-zone confirmed that the third quarter was a period of strong growth for the world economy. For the first time in this expansion, all three developed regions achieved simultaneous solid growth despite the high levels of energy prices. Accommodative monetary policies, low inflation rates and healthy growth in world trade boosted manufacturing output. High levels of household wealth allowed consumers to absorb the higher energy prices whilst improved levels of energy efficiency have moderated the impact on industrial costs.
Following good third quarter data, the Japanese growth forecast for 2005 has been revised up to 2.2%. 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.
The forecast growth rate for the world economy in 2005 has been increased to 4.3% and is expected to be followed by growth of 4.1% next year. Despite the goocd performance of the third quarter, growth is expected to fall slightly in 2006. The impact of higher energy prices and reduced subsidies on developing Asia is not yet clear. A further uncertainty is the resilience of the US economy in the face of rising interest rates. A setback to the growth of consumer spending in the US would impact exports and investment in China and other Asian economies.
The OPEC Basket displayed volatile movement in October. Higher demand for light sweet crude in the east put pressure on the sweet/sour spread, which widened for Mideast crude, while uncertainty about demand due to refinery outages in the west pushed prices lower. A lingering possibility of a further tapping of strategic reserves only added to the downward momentum. Prices changed direction on the prospect of higher demand and lower non-OPEC supply, although ample OPEC supply as evidenced by higher US crude oil stocks kept the bearish trend alive. The Basket’s monthly average dropped a hefty 5.6% or $3.25 to settle at $54.63/b. The Basket moved further downward into the first half of November on healthy crude oil stock-builds amid slower demand for gasoline and lower heating fuel requirements due to unseasonably warm weather in the Northern hemisphere. The Basket slipped well below the $55/b level to stand at $50.01/b on 15 November.
Positive developments in the US refining industry and natural gas output, combined with the resolution of a strike at Europe’s biggest refinery and slowing Asian demand over the last couple of weeks, triggered bearish sentiment in the product markets. More recently this situation has been further exacerbated by the mild winter, particularly in the US Northeast, which in turn resulted in a significant drop in product prices and refinery margins across the globe from the previous month. Despite the recent declines, refinery margins remain healthy and could lend support to crude demand. As the US market continues to be short of middle distillate products, a cold snap could reverse the current bearish sentiment, providing support for both product and crude prices.
Total OPEC spot chartering continued to increase for the second consecutive month, gaining 1.35 mb/d in October, to average 15.82 mb/d. Countries outside the Middle East were the main contributors to the growth, adding 1.26 mb/d, a reflection of the growing trade for light and sweet crudes from Africa. Sailings from the OPEC area remained almost stable, while Middle East sailings surged by 0.7 mb/d to 19.3 mb/d, an increase of 2 mb/d over a year earlier. Arrivals at the USA and Caribbean jumped by 0.95 mb/d to average 10.7 mb/d. The tanker market remained bullish especially in the Suezmax and Aframax sectors, where freight rates increased by between 26% and 80%, depending on the route, while freight rates for products continued to move upward, showing gains of as much as 180 points in the east and 120 points in the Mediterranean. Depending on the route, rates for products were between 115 to 226 points higher than the year-earlier levels.
According to the latest data available for the first three quarters of the year and projections for the remaining three months, world oil demand is forecast to grow by 1.2 mb/d or 1.4% to average 83.3 mb/d for the whole of 2005. Further undercutting the arguments for “demand destruction”, these higher figures are supported by vigorous preliminary growth data from developing countries, a brighter outlook for the world economy — particularly for the USA and OECD Pacific countries — and a rebound in Chinese apparent demand. In 2006, average world oil demand is projected to grow by 1.5 mb/d or 1.8% to average 84.8 mb/d, which represents a slight upward revision from last month’s figure.
Non-OPEC supply in 2005 is expected to average 50.2 mb/d, representing an increase of 0.35 mb/d over the previous year, following a downward revision of 94,000 b/d from last month. Including OPEC NGLs and non-conventional oils, non- OPEC supply is expected to average 54.5 mb/d, an increase of 0.5 mb/d. On a quarterly basis, non-OPEC supply has been revised down in the third and fourth quarter by 195,000 b/d and 191,000 b/d respectively; following downward revisions in Brazil, Kazakhstan, Norway, and Sudan which have been partially offset by upward revisions in Russia and Azerbaijan. In 2006, non-OPEC oil supply is expected to average 51.6 mb/d, an increase of 1.4 mb/d over 2005 and an upward revision of 34,000 b/d from last month’s report. Including OPEC NGLs and non-conventional oils, non-OPEC supply is expected to average 56.2 mb/d, an increase of 1.7 mb/d. October OPEC output is estimated to have averaged 30 mb/d.
US commercial oil stocks, which includes total crude and petroleum products excluding strategic reserves, moved up slightly, adding 0.7 mb or about 0.03 mb/d to stand at 1,050.6 mb during the period 30 September-28 October 2005. Total oil stocks in Eur-16 (EU plus Norway) during October maintained the upward trend for the fourth consecutive month, rising by 3.6 mb or 0.12 mb/d to stand at 1147.7 mb, the highest level in six years. Total oil inventories in Japan showed little change in September, remaining close to the previous month’s level of 191 mb.
The supply/demand balance for 2005 has been revised up slightly to reflect lower supply expectations. The demand for OPEC crude in 2005 (a-b) is now forecast at 28.8 mb/d, an increase of 0.62 mb/d from 2004 but 110,000 b/d higher than previously projected. The crude required for the fourth quarter is now estimated to be 276,000 b/d higher than before, and is higher than current OPEC crude production at 30.0 mb/d. In terms of OPEC capacity, taking into account the supply/demand balance as well as the resulting required OPEC crude production levels and projected production capacity, OPEC’s spare capacity is now estimated to average around 8.1% in the fourth quarter of 2005, compared to 4.9% in the same period last year. For 2006, the demand for OPEC crude is expected to average 28.6 mb/d, a downward revision of around 40,000 b/d versus last month’s report. The quarterly distribution shows that demand for OPEC crude is now expected to be 29.8 mb/d in the first quarter, 27.7 mb/d in the second, 27.8 mb/d in the third and 29.0 mb/d in the fourth.