An oil-less recovery in the industrialised world is looking more likely, as Europe's exceptionally cold winter has failed to revive demand for oil-based heating and transportation fuels in the Organisation for Economic Co-operation and Development (OECD). Since July, the outlook for economic growth this year in the 30 member countries of the OECD has improved to 2.1 per cent from close to zero, but projected oil demand for the group has barely changed, the International Energy Agency (IEA) said yesterday in its latest monthly report.
It forecast demand this year "stagnating" at last year's level, which it now estimates was 4.4 per cent lower than in 2008. "Demand in the OECD may well have peaked, with all the negative consequences for OECD refining this implies," said the Paris-based agency, which advises industrialised countries on energy issues. "Overall, this supports contentions of an oil-less recovery." "A diminishing number of OECD countries use oil for heating, power or industrial processes," the IEA noted. Oil use in OECD power generation has fallen by 40 per cent since 2000.
This year, a worldwide glut of natural gas, resulting in cheap prices for the industrial and heating fuel on spot markets, would further restrict "discretionary" oil use, the agency said."Environmental imperatives mean that gas, renewables and nuclear power will increasingly be preferred, even if binding climate change targets are stalled for now," it added. "Transportation oil use may still grow in the OECD, but here too vehicle efficiency standards and the penetration of biofuels, hybrid and electric vehicles will limit requirements for refinery-sourced [petrol] and diesel."
Nevertheless, the IEA nudged up its forecast for global growth in oil demand this year by 170,000 barrels per day (bpd) to 1.6 million bpd or 1.8 per cent, due to more robust IMF projections for worldwide economic recovery. "Global oil demand now takes its cue primarily from rising emerging country incomes," the agency said. "The thirst for oil among emerging economies looks unlikely to diminish any time soon", if economic recovery is as strong as expected.
The IEA predicted that oil demand from outside the OECD would climb to 41 million bpd this year from 39.4 million bpd last year, accounting for 47 per cent of global oil demand. The upwards revision in its forecast for developing countries' oil demand accounted for the entire amount of the agency's expectations for higher worldwide demand growth this year. The IEA's latest projections assume that the economic stimulus programmes in major developing countries such as China will be withdrawn only gradually, as "the imperative to sustain economic expansion" was expected to override concerns about inflation.
Another source of oil sector uncertainty this year, the agency suggested, concerns the extent to which currency fluctuations, particularly the "dollar trade", will continue to influence crude prices. A falling US dollar helped propel crude's unexpectedly strong recovery during much of last year, partly by making commodities priced in dollars cheaper for the holders of other major currencies. Investors also poured funds into commodities such as oil as a hedge against further dollar weakness.
While the dollar's inverse correlation with crude was looser in the latest two months, it has recently re-emerged strongly. This time it dragged crude prices sharply lower, as worries over the sovereign debt of several euro zone nations weakened European financial markets and pushed the dollar higher. Prices for benchmark US and European crudes fell to six-week lows at the end of last week, "after warmer weather in the northern hemisphere, negative macroeconomic news and sudden strength in the dollar set in motion a US$12 per barrel slide", the IEA reported. Crude has since recouped some of those losses.
The agency also noted significant uncertainty over the impact that financial sector reform might have on commodity markets, including the oil market, and growing support among policymakers for "consensus" oil pricing. That marks a major shift from the position, broadly accepted among major oil producers and consumers for at least the past three decades, that the market should determine crude prices.
The IEA, Japan's Institute of Energy Economics and the Japanese ministry of economy, trade and industry plan to hold a price-formation forum in Tokyo later this month to examine such issues. @Email:firstname.lastname@example.org