Earlier this week, the International Energy Agency (IEA) released its medium-term forecast for oil demand. In light of the economic backdrop, the organization cut by 3 mb/d its demand estimate for every year through 2013. Only by that time does the IEA see demand surpassing the 2008 peak of 85.8 mb/d. This is a significant revision from its previous prediction. A year ago, the organization said the world’s estimated daily oil needs would rise to 94.1 mb/d in 2013.
In our opinion, the demand fundamentals do not justify the current run-up in prices. As today’s Hot Chart shows, oil is more or less trading back up to the prices of 2007, when the global economy was operating above capacity.
Today, global output is below capacity, the output gap continues to widen but oil is trending up. This is quite unusual. Some pundits argue that the price resilience is due to China’s fast-growing domestic economy. In our view, such assertions fail to account for the underlying structure of Chinese oil demand.
As shown, China’s very large export-dependent manufacturing industry still dwarfs the household sector when it comes to consumption of liquefied petroleum products. Since we do not expect the level of global economic activity to return to its pre-recession peak anytime
soon, we see oil retreating to the neighbourhood of $60 in the coming months.
NBF Financial Group
