Estimates of GDP growth for 2006 have been revised up following the strong performance of the first half of the
year. Lower energy prices and steady growth in consumer incomes should moderate the expected slowdown.
The GDP of the Euro-zone is forecast to grow by 2.2% in 2006, up from 2%, and the estimate for the USA has
also been raised slightly to 3.4%. Business investment is expected to maintain the momentum of the Japanese
economy as a reduction in excess capacity and solid profits should maintain corporate cash flows. GDP growth
should be 2.8% despite some weakening in consumer spending. The Chinese economy continues to perform
well, defying expectations of deceleration. In 2006 China is expected to grow by 10.2%. These upward
revisions to forecasts for both OECD and developing economies have raised the 2006 forecast for world growth
to 5% from 4.8%.
The strong economic momentum of this year has not had much impact on growth forecasts for 2007. In fact the
dangers of higher inflation and further increases in interest rates have been intensified by the high level of activity.
US economic growth is forecast to fall to 2.6% in 2007 and despite the recent improvement of the performance
of the Euro-zone and Japan, it is unlikely that these regions will be able to grow strongly next year if US import
growth softens; moreover a weaker dollar will reduce export competitiveness. The Euro-zone is expected to
grow by only 1.5% 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 5.4% and China may also see modest deceleration to
9%. The world economy is forecast to grow by 4.3% next year.
These growth rates suggest that the expansion which began in 2003 is set to continue at a healthy pace.
Nevertheless a number of significant risks cloud the outlook. The impact of the housing slowdown in the USA is
unpredictable and the recent jump in unit labour costs may foreshadow higher inflation ahead as margins of spare
capacity are eroded. Monetary authorities have little scope to adjust policy in case of setbacks and the need to
reduce budget deficits implies less fiscal stimulus, especially in OECD countries. Global imbalances remain a
threat to the stability of exchange rates and the continued liberalisation of trade. Developing Countries may also
face declines in commodity prices next year in a climate of slower growth in world manufacturing.
The OPEC Reference Basket was volatile in August amid mixed developments. Pipeline outages in Russia and
Alaska pushed prices to record-highs with the Basket peaking at $72.67/b on 8 August. However, easing
geopolitical developments calmed market sentiment, allowing the Basket to drop below the $63 level by the end
of the month. In August, the Basket averaged $68.81/b. Other factors behind the down trend were lower
refinery run rates in Asia due to weaker margins, the end of the US driving season and ample winter distillate
supplies ahead of winter. The Basket fell further in the first weeks of September, dropping to $59.22/b on 14
September, a loss of almost $14/b since the previous month’s peak, demonstrating yet again the degree of
volatility in the market.
Product markets continued to lose their earlier strength on slowing demand, higher production and the end of the
summer driving season. As a result, product market sentiment changed significantly across the globe, putting
downward pressure on refinery margins. In September, the continuation of the bearish momentum in the gasoline
and fuel oil markets may exert further downward pressure on refinery margins. Despite healthy stock levels, the
market for middle distillates has remained relatively strong, which should result in healthy margins over the next
few months. Moreover, deeper-than-usual refinery maintenance in Europe in autumn and the transition to
ultra-low sulphur diesel (ULSD) at retail level in the USA (effective from 15 October onwards) could also
provide support to product and crude prices in the future.
OPEC spot fixtures fell 0.6 mb/d to average 13.0 mb/d in August, mainly as a result of the drop in Middle
East/Asia fixtures. Compared to a year earlier, however, OPEC spot fixtures remained 0.5 mb/d higher. Limited
tonnage availability continued to support the crude oil tanker market with freight rates higher than historical
averages, particularly in the VLCC and Suezmax sectors. Rates for VLCCs moving from the Middle East
eastbound and westbound were 90% and 50% higher than a year earlier. Similarly, Suezmaxes trading between
West Africa and the US Gulf Coast and those doing trans-Atlantic business saw rates displaying 66% growth
y-o-y. Clean tankers saw mixed patterns with East and West markets generally moving in opposite directions.
Rates for East of Suez jumped by around 38% while most of the West of Suez routes softened.
World oil demand growth in 2006 has been revised down by 0.1 mb/d since the last MOMR to stand at 1.2
mb/d, as recent data shows weaker-than-expected demand in the first half of the year. The latest US data
revealed that US summer gasoline demand grew by only 0.7%, well below the annual average of 1.6% despite
the stabilization of gasoline prices. This has led to downward revisions of 0.2 mb/d and 0.1 mb/d to second- and
third-quarter oil demand figures for North America. Developing Countries, which account for 92% of world oil
demand growth, are expected to see incremental demand of 0.6 mb/d for the year. China’s accelerating
economy continues to exceed expectations and oil demand growth could reach 8.3% by year-end. World oil
demand growth forecast for the year 2007 remains unchanged at 1.3 mb/d or 1.5%. As in the current year, the
lion’s share of oil demand growth in 2007 will come from Developing Countries.
Non-OPEC oil supply in 2006 is expected to average 51.1 mb/d, representing an increase of 1.1 mb/d over the
previous year and broadly unchanged from the last assessment. The estimate for the USA may be subject to a
slight upward revision now that Prudhoe Bay may restart earlier than previously assumed. Preliminary data for
the month of July and August puts total non-OPEC supply at around 50.9 mb/d and 50.8 mb/d, representing
y-o-y growth of 1.1 mb/d and 0.9 mb/d respectively. Next year, non-OPEC oil supply is expected to average
53 mb/d, representing an increase of 1.8 mb/d versus 2006. The 2007 growth forecast remains unchanged. In
August, OPEC production stood at 29.8 mb/d, an increase of 0.1 mb/d from the revised previous
OECD crude oil imports continued to increase for the fifth consecutive month to hit a 10-month high of 32.0 mb
in August, a rise of 100,000 b/d from the previous month and a year earlier. US and Japan’s crude oil imports
saw respective gains of 90,000 b/d and 200,000 b/d to average 10.4 mb/d and 4.2 mb/d. China’s crude oil
imports fell 363,000 b/d, the steepest decline so far this year, to average 2.5 mb/d in July. Despite the drop, for
the period January-July 2006 China’s crude oil imports averaged 2.9 mb/d, which represents a 13% increase
y-o-y. In contrast, India’s crude oil imports rose 64,000 b/d to nearly 2.2 mb/d, a gain of 3% above the
US total commercial oil inventories saw a build of 10.3 mb or 0.3 mb/d to stand at 1,066.7 mb in August versus
the previous month. Inventories now stand 4.3% and 7.2% above the year-ago level and the five-year average.
Despite a 2.5 mb draw, crude oil stocks remained at comfortable levels both in terms of volume and forward
cover. Gasoline stocks saw a further decline this month but were still well above the year-ago level and the
five-year average. Total commercial oil stocks in Eur-16 (Eu-15 plus Norway) experienced a draw of 8.4 mb in
August from the previous month but remained on par with the y-o-y level and 6% higher than the five-year
average. The draw concentrated on middle distillate and crude oil inventories. In contrast, total commercial
inventories in Japan rose a slight 1 mb to stand at 183.9 mb in July, but remained at a deficit to last year’s level
and the five-year average. A build in middle distillate stocks and a recovery in crude oil inventories offset the loss
in gasoline and residual fuel oil stocks.
The demand for OPEC crude in 2006 is expected to average 28.9 mb/d, representing a downward revision of
0.2 mb/d versus last month. In 2007, the demand for OPEC crude is expected to average 28.1 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 29.2 mb/d in the first, 27 mb/d in the second, 28 mb/d in the third and 28.4 mb/d in the