While global equity markets underwent major corrections, crude oil prices have refused to ease so far. Whatever weakness was seen earlier in the month has disappeared, with Brent crude prices moving up into three-digit territory at $112 per barrel. The reason is a visible tightness in oil’s demand-supply dynamics. Debt problems in the US and Europe and signs of slowing economic growth had softened oil prices earlier in August. The US GDP data was revised at the end of last month to reveal the country’s absolute GDP hadn’t grown since 2007 and that growth in the first half of 2011 now stands at an annualised rate of barely 1%.
While global trade is also declining steadily. Capgemini Consulting saidthat its Global Trade Flow Index that tracks import and export of goods and services for 23 top countries witnessed a sharp 8% fall in the first half of 2011. Since the global oil demand is closely linked to the economic growth and trade, this stagnancy has resulted in a downward revision in oil demand growth.
Opec’s decision to increase oil supply and International Energy Agency’s release of 60 million barrels of emergency petroleum reserves further added to the weakness. Still, these factors have clearly not been able to keep prices low for long. The demand forecasts, are still high and a number of geopolitical factors are creating supply tensions.
The quarters ending September and December typically see the year’s highest demand for oil. The oil demand in the second half of 2011 is expected to average 90.4 million barrels per day (mbpd) as per estimates of International Energy Agency. Adjusting for non-Opec supplies, the Opec will need to produce at an average 31 mbpd to meet this demand, which is higher than their current production rate of 30 mbpd. At the same time, the oil demand is not likely to go down in line with the slowdown in economic growth. The global growth is being led by developing countries such as India and China, where the fuel consumption is growing unabated.
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