In depth: OPEC report analysis

World Oil Outlook 2009: Asia will provide 80% of demand growth to 2030

OPEC secretary general Abdallah El-Badri
OPEC secretary general Abdallah El-Badri

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Last month’s OPEC market report revealed that several encouraging trends have begun to take root, and economic indicators are for world oil demand to return to positive growth in 2010.

The OPEC reference basket surged $11.38 per barrel, or almost 20% to average over $68 in June. Encouragingly, wild fluctuations appear to have exited the market, with July closing just below at $68.32 at the time of going to press. These figures are the highest monthly averages recorded since October 2008.

“Considerable optimism over prospects for the world economy, US dollar fluctuations and rising equity markets helped the basket firm to over $70/b as the market moved further into the driving season,” stated the report. However, it warned that weak demand and continuing builds in refined products capped the bullish sentiment.

Economic outlook
The report stated that the 1.4% contraction so far this year, the world economy is expected to rebound in 2010 with growth of 2.3%. The OECD is forecast to grow at a miserly 0.7%, up from -3.9% in 2009. The US is expected to grow at 1.2% next year, but the report highlights that the main concern in the OECD group continues to be the Eurozone, which is expected to decline a further 0.4% after this year’s massive contraction of 4.6%. Despite some encouraging signs in the OECD, many uncertainties prevail as unemployment is expected to grow further, and consumer sentiment remains restrained to say the least.

Oil Demand
The OPEC report says that world oil demand is expected to turn positive in tune with the global economic picture in 2010. “After two consecutive years of negative growth, global demand next year is projected to show an increase of 500 000b/d. Non-OECD are expected to make up the bulk of the increase, growing by 800 000b/d. It follows in the analysis that the OECD region is forecast to see a continued contraction of 300 000 b/d, following a decline of 1.8mb/d in 2009.
The overall global economic outlook will be the biggest factor impacting oil demand growth. “The pace of global economic recovery continues to be the main risk for outlook for the next year. For the current year the world oil demand growth forecast remains at -1.6mb/d.

The report also estimates that the demand for OPEC crude in 2009 will average 28.5mb/d, a decline of 2.3mb/d from 2008. In 2010, the demand for OPEC crude is expected to average 28.1mb/d, representing on 400 000b/d drop from the current year.

World Oil Outlook
Last month also saw the unveiling of the hotly anticipated 2009 World Oil Outlook report from OPEC HQ in Vienna.
Essentially the outlook for oil producers is rosy. Under all of the reference scenarios factored in, global energy use is still set to rise. In the reference case, it increases by 42% from 2007 – 2030. Developing countries will account for most of these increases, by virtue of higher population and economic growth.

“However, energy use in developing countries will remain much lower on a per capita basis, and globally, renewable energy will continue to grow fast, but from a low base,” it says. The outlook points out that nuclear energy’s slice of the mix grows faster than in the previous outlook, while hydropower is also set to expand faster than the oil growth rate. "Realistically, however, fossil fuels will continue to satisfy most of the world’s energy needs, contributing more than 80% to the global energy mix over this period. And oil will conitune to play the leading role to 2030.”

Analysis
Interestingly, the report has revised downward oil demand projections in both the medium and long term assumptions. The medium term prospects for oil demand are adversely impacted by the lower economic growth projections.

“Given the anticipated slow recovery, the annual increments in demand for 2010 and 2011 are below that of 2012, once economic growth has returned to its full potential. This represents a major reassessment from the previous reference case. By 2013, oil demand is 5.7 mb/d lower than in last year’s outlook, with a difference of 4mb/d already witnessed in 2009.”

As the report projects further into the future, it concedes that the global recession has had a significant impact on previous estimates. “Efficiency improvements are stronger than previously assumed, and this compounded with the global recession, has led to a significant downward adjustment to oil demand in the longer term. Oil demand in the reference case is less tha 106mb/d in 2030, down from 113 mb/d last year.” Almost 80% of net demand growth is expected to come from developing Asia. “Nevertheless, the per capita oil use in developing countries will remain far below that of the developed world. For example, one person’s use in North America will still be 10 times that of South Asia.”

Revised – but only just
The report digests a great many complex factors and provides a projection which confirms the world will be different in 2030 – but not too much. Solid rationale for continuing usptream investment, and good news for oil producers everywhere.

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