Focus: Global supply-demand revisited
The prospect that demand projections would need to be revised downward reached fruition in the latest IEA monthly report for November. High prices and weaker than expected economic growth appear to have restrained demand. Nevertheless, despite a recovery in production levels, the prospect that supplies will still fall short of demand has helped underpin values. With prices approaching a record of $100.00 per barrel, the question still remains as to whether it will be enough to curtail demand to a more reasonable level given prospective supply availability during the fourth quarter and into 2008.
For the fourth quarter of 2007, global crude demand was revised down by .5 mb/d to 87.1 mb/d. leading to demand reaching 85.7 mb/d for the full year. The impact was carried forward into 2008 where demand is expected to reach 87.7 mb/d compared to 88.0 mb/d estimated previously. Growth in demand was subsequently placed at 1.2 percent for 2007 and 2.3 percent in 2008.
On the supply side, an improvement in availability was apparent as higher output in Russia and China boosted non OPEC supplies. OPEC crude supplies also showed a marked increase of .4 mb/d to over 31.0 mb/d in October. The increase in output levels for OPEC suggests little room for error as spare capacity continues to fall, reaching only 2.46 mb/d. Overall; supply for the fourth quarter is expected to total 86.3 mb/d, an increase of 1.1 mb/d above the third quarter. Despite the increase, supply availability will fall short of anticipated demand during the third quarter by .8 mb/d.
Key to the outlook will be the OPEC ministerial meeting in early December. Nervousness will undoubtedly be caused by OPEC sensitivity to recent demand declines, dollar weakness and the expanding production capabilities of Russia.
They may opt to take a wait and see attitude to assess their current production levels, particularly out of Iraq and Angola, and allow for some possible expansion in output from core members outside of the target rates before making a decision.
Outside of OPEC, key considerations will include:
- Economic growth, particularly in non OECD areas, and how the credit crisis impacts these areas and ultimately energy usage.
- Weather, which has trended toward normal and is forecast to register above normal temps for the latter part of the winter.
- Impact of growing nationalism on supply availability in Venezuela and Russia.
- Growing environmental activism and its impact on energy usage and the adoption of alternatives to petroleum products.
- Refinery capacity expansion and its impact on margins for refined products, which have helped soften the impact of higher crude prices and ultimately the demand response.
- Impact of higher prices on demand, particularly in the U.S.
The effect of higher prices on both the supply and demand side will be closely watched as we enter 2008. The impact of crude moving up near $100.00 so far has not been enough to drastically dent demand, and in the absence of fresh weakness to the economy, prices may well need to go higher before any significant demand destruction is seen.
For more information on Over the Barrel, please contact Steve at 1.877.377.7931 or stephen.platt@archerfinancials.com.
The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation. The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition. The information and comments contained herein is provided by ADM Investor Services, Inc. and not Archer Daniels Midland Company. Copyright © ADM Investor Services, Inc.
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