OPEC Cuts Global Oil Demand Forecast, Sees U.S. Growing 1.8% In 2012

12 Oct

Estimates for crude oil demand in 2011 and 2012 were once again downgraded by the world’s largest oil cartel, the Organization of Petroleum Producing Countries (OPEC).  In their latest oil market report, OPEC lowered its forecasts for the global economy and the U.S., while they expect softness in 2012 oil demand to outpace the slowdown in supplies, putting further pressure on prices.

Global oil demand in 2011 will average 87.7 million barrels per day, OPEC announced Tuesday, up 0.88 million barrels per day from previous estimates, which had already suffered various downward revisions.

Oil prices have already broken down this year, as the specter of a global economic recession grapples markets.  Despite a recent rally, Brent crude is down more than 10% in the last 6 months while WTI has tumbled almost 20% in the same time period.

OPEC’s revised numbers reflect the cartel’s concern with the global economy.  They expect the U.S. to grow at an average 1.6% this year, inching up to 1.8% in 2012.  While they see some sort of stability in relation to labor markets and manufacturing, OPEC still thinks the U.S. is suffering the consequences of the Great Recession.  “Growth seems only to be possible with the backing of the government or the Federal Reserve Board (FED), providing supportive monetary measures,” they note. (Read U.S. Economy Is Five Years Into Its Own Lost Decade).

Going forward, OPEC sees the global economy growing 3.7% in 2012 (up from 3.6% in 2011).  Global oil demand is expected to increase by 1.19 million daily barrels, or 1.36%, to 89.01 million barrels per day.  Interestingly, OPEC sees U.S. oil demand as playing a major role in total world demand next year, with retail petroleum prices being one of the major catalysts.

China will be another big player.  Their demand is expected to be less solid than in other years due to government policy, both in slowing inflation and avoiding overheating, and putting a cap on the use of transport fuel by the Chinese government.  Demand in 2011 is expected to average 9.43 million barrels a day, and is estimated to grow 0.48 million barrels or 5.13% to 9.92 million barrels per day. (Read China Buys Shares In Major Banks As Shadow Banking Credit Grows).

What matters the most for markets, though, are oil prices.  These are a consequence of the balance between supply and demand.   In a piece I wrote last week, I explained that producers’ capacity to manage the supply-demand balance would keep the market tight, and prices volatile and high.

Demand for OPEC oil will remain unchanged in 2012, according to their oil market review, at 26.89 million barrels per day, as the downward adjustment in global demand outpaced the downward revision in non-OPEC supply (forecasted at 53.46 million barrels per day).  Thus, markets will remain tight through the year, despite substantially lower demand growth than expected.

While oil prices tumbled more than 15% in the third quarter, prices can remain high next year.  If indeed supply-demand balances remain tight, JPMorgan’s commodities research team estimates Brent crude will average $115 through 2012.

According to RBC Capital Markets, large caps like BP, Exxon Mobil, andChevron are discounting a long-term WTI equivalent of $61 per barrel of oil equivalent.  If the Brent-WTI spread remains at $24.30, like it did through September (its sixth consecutive month of widening spread), that would translate to Brent at $85.30, suggesting large caps are set to thrive in the current environment. (Read Crude Oil Will Average $115 Through 2012).


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