Oil prices heading down to new range

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18 April 2013, Oil

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In early trading on the morning of April 16, the value of Brent crude oil slipped below $100/bbl, the first time the price has fallen to this psychologically important level since mid-July 2012. This should not be a surprise as trends on both the demand and supply side of the market balance have pointed for some time toward an oversupplied market. Only a lack of clarity on the real state of the global economy and lingering geopolitical concerns from the Middle East and more recently North Korea have put off the day when prices started to fall.

For oil demand nearly 50% of global growth comes from China, with the rest coming from the developing world. As far as the old world is concerned, it is a little noted fact that oil demand in the US (which still uses 20% of the world's oil) peaked in 2005 at 20.8 million barrels per day, European oil demand peaked in 2006 at 14.3 million b/d, and Japan's oil demand peaked in 1996 at 5.8 million b/d. If markets take the view that China's GDP growth is falling to "only" 7.7% in 2013 this raises doubts about the firmness of global oil demand growth (and indeed, that for other commodities), and thus partly explains the fall in the price of Brent crude oil.

Meanwhile, global oil supply confounds the peak oil theorists by rather inconveniently rising year after year. How much growth is shale-derived and how much is "conventional" is an irrelevant distinction to customers at the pump: the message is that supply is plentiful and will be for many years to come. The OPEC countries are sitting on anywhere between 3.5 million to 4.5 million b/d of spare production capacity, and many non-OPEC producers are seeing production increase, including the US, Canada, Brazil, Colombia, and Oman.

In 2013 it is expected that the non-OPEC countries will supply about 1 million b/d more than in 2012. Global demand will increase by about 0.8 million b/d. It doesn't require forensic analysis to see that this is a clear signal for prices to head down and that this big picture outlook is the main reason behind falling oil prices. How far prices will fall is pure guesswork, but a clue can be found in the fact that at the end of May OPEC oil ministers will gather to look at the oil market. By that time the Brent crude oil price may have already slipped below, say, $90/bbl, and thus ministers will be discussing supply cuts to put a floor under the price. For sure, no OPEC minister will be happy to see crude oil prices fall sharply; they serve growing populations and need prices to stay close to current levels to meet their budgets.

At any rate, we are heading for an interesting few weeks.

www.datamonitorenergy.com / asken@datamonitor.com / @DatamonitorEN

Source: MarketLine

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