Second quarter GDP data confirmed a reduction in the growth rate of the world economy despite a significant
improvement in the Euro-zone. GDP in the Euro-zone and in Germany grew by 3.6% in the second quarter.
Second quarter growth in Japan fell to 0.8% as result of a decline in public investment and stagnation in exports.
Following a very strong start to the year the US economic growth moderated to 2.5% in the second quarter. The
Federal Reserve did not raise interest rates further in August, noting that slower economic growth is likely to ease
US interest rates may no longer be increasing in 2007 but the previous tightening of policy is expected to depress
GDP growth below 3% next year. It is unlikely that Europe and Japan will be able to grow strongly in 2007 if
US import growth softens; moreover a weaker dollar will reduce export competitiveness. The Euro-zone is
expected to grow by only 1.4% in 2007 as fiscal policy tightens and Japan may only achieve 1.9%. Growth in
developing countries is also expected to be lower in 2007, falling to 5.2% and China may also see a modest
deceleration to 8.7%. The world economy is forecast to grow by 4.2% next year, compared to 4.8% in
The OPEC Reference Basket rose $4.32/b or 7% to average $68.92/b in July as geopolitical developments
pushed prices to record highs. Ongoing tensions in the Middle East amid healthy economic growth and strong
gasoline demand in the west supported the bullish market sentiment. The Basket broke a new record high of
$71.71/b on 14 July with the onset of the recent crisis in the Middle East. Concern over the return of disrupted
supply from West Africa added to the bullish sentiment amid a leakage in Russia’s Druzhba pipeline and tight
North Sea supply. In the first two weeks of August, the Basket again set a new record, reaching $72.67/b on 8
August, on news that BP would shutdown its Prudhoe Bay field in Alaska due to pipeline corrosion. However,
the return of half of Prudhoe Bay production and the improving geopolitical situation allowed prices to ease
downward to $69.01/b on 15 August.
Refinery glitches and higher demand for various products due to the driving season and cooling requirements
have further strengthened futures and physical product prices in the USA, resulting in higher refinery margins in
July. Although European refiners continued to benefit from the gasoline arbitrage to the USA, refining margins still
declined from the previous month due to the higher cost of benchmark Brent crude and relatively sluggish
regional demand. The product market sentiment also weakened. Apart from the performance of the bottom of
the barrel — which was very disappointing across the board — most barrel components may lose their earlier
strength as the end of the driving season approaches and market players shift their attention to middle distillate
stock levels, which stand at relatively comfortable levels around the globe. As a result, the current crack spreads
of light products against the benchmark crudes may narrow. Of course, potential developments during the
hurricane season in the US Gulf could dramatically change this outlook.
OPEC spot fixtures averaged 14.4 mb/d in July, which corresponds to a 90,000 b/d decline from the previous
month but a gain of 0.9 mb/d over a year ago. The decline is essentially the result of a drop in OPEC production.
Similarly, sailings from OPEC fell 80,000 b/d to 24.5 mb/d but showed y-o-y growth of 0.3 mb/d. The crude oil
tanker market remained very bullish with rates continuing to increase, especially for VLCCs moving from the
Middle East eastward where rates peaked in July to their highest level so far this year. The robustness in freight
rates was triggered by tightness in supply where healthy trade — especially from China — reduced the
availability of tankers. The clean market showed some signs of weakness in the East but in the West rates
World oil demand growth in 2006 is now estimated at 1.3 mb/d to average 84.5 mb/d. This represents a
downward revision of 80,000 b/d from last month's figure due to an unexpected decline in OECD consumption
in the second quarter of this year. North American oil demand growth for 2006 was revised down by 40,000
b/d from the previous month. Growth in the OECD countries is expected to be somewhat stronger in the second
half of this year given the stabilization of gasoline prices, continued economic expansion, and normal weather in
the fourth quarter. For the year, OECD oil demand is expected to grow by 0.1 mb/d. In contrast, Chinese oil
demand growth was revised up by 40,000 b/d due to the unexpected strong demand in the second quarter.
Moreover, strong economic activities in the Middle East are expected to continue until year-end, resulting in a
300,000 b/d increase in regional oil demand for the year. In 2007, world oil demand growth is forecast at 1.3
mb/d or 1.5%, unchanged from the previous month, with China and the Middle East expected to be the leading
Non-OPEC oil supply including processing gains is expected to average 51.1 mb/d in 2006, representing an
increase of 1 mb/d over 2005, but a downward revision of 234,000 b/d versus the last assessment. The
adjustment primarily reflects lower production from the US (Alaska), Canada and Norway. Preliminary data for
June 2006 puts total non-OPEC supply at around 50.3 mb/d, or 300,000 b/d lower than the previous month.
The impact of unplanned shutdowns, maintenance and hurricane related losses in the US Gulf of Mexico affected
a significant amount of supplies in the month. In 2007, non-OPEC oil supply is expected to average 53 mb/d,
representing an increase of 1.8 mb/d versus 2006 and an upward revision versus last month. This upward
revision comes despite a downward adjustment to US Alaskan production, as base has been revised down
primarily as a result of lower baseline production in Malaysia. In July, OPEC production stood at 29.5 mb/d, a
decrease of 0.2 mb/d from the previous month.
Preliminary data shows that OECD total net oil imports increased 154,000 b/d to average 27.6 mb/d in July, the
highest level so far this year. Data showed a growth of more than 700,000 b/d over the same period last year,
primarily on the crude oil side. In contrast, US crude imports fell 311,000 b/d as a result of a 260,000 b/d drop
in refinery throughput while product imports rose 250,000 b/d to 3.7 mb/d. In July, Japan’s net oil import
dropped 100,000 b/d with two-thirds of the losses coming from crude. China’s crude oil imports showed a slight
decline of 50,000 b/d in June to average 2.9 mb/d while product imports increased for the fourth consecutive
month. China’s crude oil and product imports rose by more than 15% during the first half of 2006 compared to
the first half of 2005. India’s crude oil imports fell 128,000 b/d in June to 1.9 mb/d but remained 235,000 b/d
higher than a year ago.
US commercial oil stocks experienced a draw of 16 mb to stand at 1,045 mb in July. However, inventories
remained 0.3% and 5% higher that the year ago and five-year average. In terms of forward cover, crude
inventories remained stable at 21.2 days in July compared to 21.3 days in the previous month and were 9%
above the upper end of the five-year range. Total commercial oil stocks in Eur-16 (EU-15 plus Norway) rose a
slight 0.6 mb in July to stand at 1,149 mb, or 1% above a year ago and around 9% higher than the five-year
average. In Japan, commercial oil inventories witnessed a decline of 4.8 mb or 0.16 mb/d to stand at 183 mb in
June, below the five-year average.
The estimated demand for OPEC crude in 2006 is expected to average 29.1 mb/d, representing an upward
revision of 0.2 mb/d versus the previous month. The estimated demand for OPEC has been revised up 0.2 mb/d
in 3Q06 and 0.3 mb/d in 4Q06, driven by lower than expected non-OPEC supply growth. In 2007, the
estimated demand for OPEC crude is expected to average 28.3 mb/d, representing a decline of 0.8 mb/d versus
2006. On a quarterly basis, the forecast shows that demand for OPEC crude is expected at 29.3 mb/d in the
first, 27.2 mb/d in the second, 28.1 mb/d in the third and 28.7 mb/d in the fourth quarter.