The shift in sentiment is grounded on assumptions that world economies are going to recover, fueling higher demand. The forecast also points to growing demand from China as the biggest force behind higher petroleum usage this year.
Sometimes these forecasts prove correct, many times they are wrong. One need go back only two years when IEA, EIA, and just about every other agency was predicting higher prices and surging demand just a few months before the market
collapsed.
IEA allows for some skepticism in the April forecast, writing
that “underlying concerns remain that oil markets are overheated with West Texas crude and Brent (the benchmark crude for futures trading) recently hitting 18-month highs.”
We continue to see contradictory signs that oil demand is on the rebound, though it is foolish to deny it could be so.
One of the most astounding pieces of news this week came when U.S. automaker General Motors said it would sell 2 million cars in China in 2010, reaching that plateau four years ahead of schedule. It also predicted that it would reach 3 million in vehicle sales by 2015 in China. GM says auto demand in China is running 70% higher than a year ago.
Given those kinds of numbers, its difficult to dispute that China will fuel a large portion of the growth in oil demand projected by IEA.
On the other hand, a survey by the Associated Press of economists over a wide range of businesses in the U.S. indicated that the U.S. economy would remain in the doldrums for the next two years, especially regarding jobs and
housing, two twin pillars of the economy.
The survey indicated that U.S. economic growth would be about 3%, not enough to support job growth, meaning that America’s unemployment rate would continue to be high.
Nonetheless, IEA believes that world oil demand will hit a record in 2010, topping the prior number of 86.5 million b/d set in 2007. That would be a much faster recovery from a debilitating price spike than occurred following the 1979 price spike, the previous record. It took U.S. oil demand nearly two
decades to recover to pre-1979 price-spike levels.
Global oil demand will grow by 1.7 million b/d in 2010, IEA projects, to 86.6 million b/d. Most of the extra demand will come from the non-OECD sector, including China, as the developing countries claim a larger share of the world
petroleum pie.
Here’s what one can also glean from IEA’s April report. The 2010 gap between world oil supply and demand is shrinking. In fact, if you take IEA’s March 2010 global demand production figure (86.6 million b/d), it matches the agency’s demand forecast for 2010, leaving no cushion.
IEA noted that OPEC crude production posted its first significant decline in over a year, falling 190,000 b/d in March to 29 million b/d, thanks to a 10% drop in Iraqi crude production. However, OPEC’s quota system excludes Iraq, and
the eleven other members of the cartel managed to hike production in March.
A couple of threats remain to the robust picture painted by IEA. First — and IEA admits this — higher oil prices could stifle economic growth, punching a hole in demand. More importantly, there remains lots of excess refining
capacity and sufficient crude stocks to cover the extra demand so a ceiling on price levels could exist.