Oil Prices Have Peaked?
Well at least for the time being oil prices seem to have peaked. The recent run up in oil prices always struck me as being a bubble, at least in part. Sure there was increased demand from countries like India and China that added to the upward movement in prices, and the instability in the Persian Gulf doesn’t help, but we still have these things and now the price is down 23%. Of course, it also helps that consumers are using less oil and oil based products than they were previously.
World oil consumption is now growing at a significantly lower pace than had been imagined a year ago. Last October, the International Energy Agency was forecasting global demand growth for 2008 of 2.1m barrels a day, with 750kb/d from the OECD and 1.33mb/d from emerging markets. In their latest monthly report, the IEA has slashed this by more than 60 per cent to 800kb/d, with OECD demand actually forecast to decline by over 600kb/d and emerging markets demand to grow by 1.4mb/d.
I imagine that one thing that is going on is that the higher prices in the developed world are going to start having an impact on imports. According to the Bureau of Economic Analysis imports for the last three quarters have been negative (-2.3%, -0.8% and -6.6% respectively). This in turn will hurt developing countries that are dependent on their export industries for driving growth–e.g. China. This could have additional impacts on the price of oil.
For China, which has been responsible for more than half of global base metal demand growth and as much as one-third of global petroleum demand growth, challenging times are ahead for exporters and the metal and energy-intensive producers of steel, aluminium, cement, and other primary products.
Contrary to popular myth, these energy- intensive industries rather than the transport fleet are consuming the middle distillates that drive two-thirds of China’s petroleum demand growth. And now due to higher energy costs, an appreciating yuan, weak export markets, and a protectionist backlash, exports are falling, with ramifications for their demand for resources. With China at a crossroads and GDP growth slowing to 8 per cent, product demand growth could drop from its three-year average of 490kb/d to 350kb/d (up 4.4 per cent) in 2009.
We wont see oil prices back in the $50 to $60 range, but I wouldn’t be surprised if they drop a bit more.