Oil Price Moderation: When will that happen?

The Asian markets continued the downtrend on the event of the crude oil crossing the $100 per barrel mark for the first time in 2008. Markets weighted heavily on the current uncertainties and volatilities involving crude oil prices. Even on the backdrop of an US recession when analysts predicted the easing of off crude oil prices due to a potential low demand from the US, oil seems ride high on the financial streets with no sign of moderation.

Is Global Recession to Ease Oil Demand?

Demand pressures on oil prices are here to stay and there is a little chance of oil price moderation which is still trading above $95/brl. And, with higher oil prices on the horizon, upside risk to inflation forecast in US and emerging markets would weigh down on Fed policies and interest rates which the markets expect to ease the ongoing credit squeeze. Funding constraints of ongoing projects due to a recession could well affect crude oil prices and production demand easing in the world’s largest economy, the US. China, being the third biggest importer and the largest exporter could feel the pinch if export demand comes down the line. But is it also expected that a strong emerging markets growth in investment and consumption is likely to keep up the demand for oil and petroleum-products in 2008.

Petroleum (Oil) Sector Outlook:

Oil Exploration, Production and Output: Demand vs. Supply Story “It is estimated that the world liquid fuel consumption will increase from 83mn barrels per day in 2004 to 97mn barrels/pd 118mn barrels/pd in 2030”. (IEO Report). World crude oil prices are estimated to fluctuate between $38 on the lowest and $157 on the highest, according to IEO estimates. By 2030, OPEC is expected to produce 57mn barrels per day as against non-OPEC countries that would be producing around 61mn barrels/pd. In 2004, OPEC produced some 41% of global oil, below its high of 53% in 1973.

A price shift for crude oil is on the line but one is to notice whether it will be a demand induced or supply driven. As of January 1, 2007, proved world oil reserves, as reported by IEO, were estimated at 1,317 billion barrels. With this ever expanding demand and supply constraints in the global petrochemical industry, China, India and other Asian countries shed a strong outlook for the coming 2-3 years despite a threat of impending US recession. The global petroleum
industry is valued around $ 3.4 trilllion, with an annual growth rate of 4%. BRICS nations are poised to play a dominant role in global expansion of the refining industry due to increase in demand from the related client industries.

Capacity expansion of petrochemical plants and new investments for exploration and production projects are to keep the spirit of the petro- energy sector in both China and other countries. Global giants like Chevron, ConocoPhilips, CNPC, Shell, BP, Exxon and others have taken initiatives for further expansion of oil and gas pipeline network, thus providing a strong outlook for the petroleum producing countries.

Sources: IEO, Bloomberg, FT
Right Horizons' Research Desk