Is this the end of the oil boom? Having hit a new record of over $147 a barrel, oil prices have since slid by over 10% to under $130 over the past few days. This is partly due to better news on the geopolitical front as the US agreed to enter talks with Iran over its nuclear programme. But the key factor is growing signs that high prices are lowering demand in the US, the world’s biggest oil consumer. “People are giving up their Humvees and pick-up trucks”, and the market is finally starting to notice, says Joel Fingerman of FundamentalAnalytics.com.
Last week brought news of a three-million barrel jump in US crude inventories, while analysts had been pencilling in another decline. US demand for crude products is down 2% from a year ago and retail demand for petrol has fallen by 5%. Economic growth isn’t just slowing in the US; China, the key driver of developing world demand, posted its slowest annual growth rate in three years last quarter, 10.1%. Export growth slowed sharply to 17.6% year-on-year in June, down from May’s 28%.
With pipeline price pressures still high, there is a danger of rising inflation expectations leading to higher prices, with a significant economic slowdown needed to bring inflation under control, notes Capital Economics. The danger for emerging markets in general, as Morgan Stanley says, is that with their central banks having to combat high inflation at the same time as the developed world slows, a “significant growth deceleration” could be on the cards, implying lower demand for commodities.
Growth in China’s demand for oil is easing, says Edward Morse of Lehman Brothers. It increased by around 4.7% year-on-year in the first half, down from 7.1% in the first six months of 2007, and could subside further to 4.1% next year as GDP growth falls to 8%. The global picture is one of demand subsiding rapidly. This year worldwide demand growth will be about 900,000 bpd, 600,000 below Lehman’s January forecast; the International Energy Agency has also just made a similar reduction to its forecast.
Consumption in the OECD is set to shrink by 300,000 bpd, including a 430,000 bpd drop in the US, predicts Morse, with emerging markets making up the difference. Meanwhile, “supply is starting to look stronger”, says Edward Hadas on Breakingviews.com. More oil is on the way from Saudi Arabia and more is likely to come from Russia, the second-largest producer, following tax cuts for oil producers.
Indeed, Opec capacity additions are likely to average two million bpd in 08/09 and outpace demand growth over this period, reckons Morse. He sees the oil price weakening to an average of $93 a barrel by the first quarter of next year. Martin Spring in his OnTarget newsletter takes a similar view, with speculators set to turn tail and drive oil down to around $90 by early next year as short-term supply improvements and slowing global growth take their toll.
Veteran analyst Marc Faber, too, sees oil sliding to $100 as the global economic boom weakens, notes Bloomberg.com. But given Asia’s continuing industrialisation – Faber sees overall demand doubling in the next 12-15 years – and ongoing long-term supply problems, the slide should prove merely a correction in a long-term bull run.