Oil market challenges for second half of 2013

The year 2013 has so far been characterized by slowing momentum in the world economy. This has been due to lower growth not only in developed countries but also in some emerging economies. As a result, the forecast for global oil demand growth in 1H13 has been revised down from initial projections, as the contraction in OECD demand was larger than expected and the pace of growth in the non-OECD has slowed.

Looking at the second half of the year, the world economy is expected to experience slightly higher growth. This is due to a base-effect from low growth levels in the first and the second quarter of the current year and on the assumption of some recovery in the U.S., as well as in the major emerging economies and the Euro-zone. Meanwhile, Japan is already enjoying steady growth, as a result of the government’s ambitious stimulus initiatives. However, developments such as the slow-down in the major emerging companies and in the U.S. in the first half of the year highlight the continued fragility of the global economy. Recent signs of a lower-than-anticipated expansion in the U.S. and China, such as the latest PMI numbers for manufacturing, underscore this trend, although the global momentum remains intact. Whether a host of factors – the recovery in the U.S. labour market and the improvement in the housing sector, the relaxation of austerity measures in the Euro-zone, the stimulus in Japan, improving export opportunities, and expected government-led support in the major emerging economies – will materialize to support the expected rise in growth levels for 2H13 should be clearer as data becomes available.

In the oil market, the second half of the year is expected to see higher demand in absolute terms, primarily due to the structural change in the seasonal pattern. A number of factors are driving these developments, particularly the falling share of winter fuels in total oil demand, as a result of increasing fuel substitution by natural gas. Growing use of air conditioning in the summer, particularly in the developing countries, has also pushed third quarter demand higher. World oil demand is expected to reach 90.5 mb/d in the second half of the year, higher than the estimated 88.8 mb/d in the first half. In terms of demand growth, the expected global economic recovery in the second half of this year could also add more barrels to seasonally higher global consumption.

Growth in the second half is projected to increase by 0.9 mb/d, compared to 0.7 mb/d over the first two quarters. However, risks are skewed towards the downside. In the OECD, this is due largely to the weak economic outlook for Europe, as well as to any possible setbacks in the U.S. economic recovery. For the non-OECD, risks stem growth in recent years. The Middle East and Latin America are the main regions with the potential to surpass current demand expectation, due to expansion in the transportation, power generation, and construction sectors.

On the supply side, non-OPEC supply is expected to continue the healthy performance seen in the first half, supported by anticipated growth in OECD Americas as well as the FSU, Africa and Latin America. The U.S. and Canada are seen to be the main drivers of non-OPEC supply growth in 2013. In the second half, non-OPEC supply is projected to increase by 1.1 mb/d, outpacing the estimated growth of 0.9 mb/d in the first half of this year. However, this forecast is associated with risks due to weather and technical factors, as well as geopolitics. Over the same period, OPEC NGLs* and non-conventional are projected to continue to increase adding 0.2 mb/d.

Taking into account all of these developments, demand for OPEC crude in the second half of 2013 is expected to average 30.5 mb/d. This is broadly in line with current OPEC production. Overall, existing fundamentals portray a market with ample supply, which is further reflected in comfortable crude oil stock levels and improving gasoline inventories at the start of the driving season. However, uncertainties on both the demand and supply side have the potential to undermine the expected market balance in the second half of 2013.

* NGLs: natural gas liquids

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