Over The Barrel: Global Demand 2008

The global demand situation is growing in importance due to increased uncertainty regarding economic prospects for both the U.S. and Europe. How deep the slowdown will be is a source of concern for the crude oil outlook given that total OECD demand accounts for over half of global demand. In addition, the impact on non-OECD countries will also be a key consideration since these have been the main drivers of growth in world oil demand. 

OECD

OECD countries showed a modest demand slowdown in 2007, led by Europe and Asia, where high prices and sluggish economic growth led to a 1.7 percent decline. For 2008, demand is currently forecast to rise by a combined .4 mb in these areas, as economic momentum in Europe builds and crude and resid are utilized for power generation in place of nuclear sources.  Japan and the region including Korea continue to benefit from strong growth in non-OECD countries in the region.

In North America, doubts are arising over the ability of demand to grow in the face of stalling economic growth in the U.S. due to the weak housing market. Although demand has held so far, the weakness in the housing sector could shave off up to .1-.2 tb/d from current estimates. Weakness in the U.S. could affect the economies in Canada and to a lesser extent Mexico, as demand for goods utilized in the housing industry suffer sharp declines and freight volumes decline accordingly.  Contributing to the uncertainty will be demand for heating oil, particularly if the winter proves milder than normal.  

Non-OECD

Strength continues to be apparent in non-OECD countries, although scaled back from earlier 2007 estimates. For 2008, non-OECD demand is forecast to total 38.0 mb/d, an increase of 1.5 mb/d, or 4 percent above 2007. The increase might be difficult to achieve given that the gain in 2007 was only 1.1 mb/d.

China will obviously be a key determinant, where demand is expected to total 8 mb/d, an increase of 5.7%, compared to a gain of 5.1 percent in 2007. Given high prices and attempts to pass these on to the retail level, some retrenchment in growth rates would not be surprising despite the IEA forecast. In India, demand has been particularly buoyant, stimulated by petrochemical offtake and sales to the transportation sector. Although demand is forecast to be rather stagnant at 2.9 mb/d in 2008, it might overshoot those estimates given ongoing strength to the economy.

Another noteworthy area with respect to demand is the former Soviet Union.  Oil wealth and a stable political climate are leading to ongoing strength in the domestic economy. Subsequently, we expect demand in the FSU to total 4.0 mb/d, vs. 3.9 in 2007. Also, expansion of petrochemical capacity and strength in the transportation sector continues to favor demand prospects in the Mid East, with Saudi Arabia expected to register a 4.3 percent increase to 2.2 mb/d. 

In conclusion, although the current forecasts suggest little sign of any retrenchment in demand for the coming year, the uncertain economic picture for the OECD countries does cloud the outlook and create the possibility that current estimates might be overstating consumption in some key areas.  Nevertheless, given the tightness of supplies and limited excess capacity, the market will need solid evidence of a demand retrenchment amidst better availability before a significant correction takes place.

For more information on Over The Barrel, please contact Steve Platt at stephen.platt@archerfinancials.com or call 1.877.377.7931.

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.