|Distillates (jet fuel, kerosene, diesel and other gasoil) will remain the main growth drivers of world oil demand, followed by LPG and naphtha (mostly used as petrochemical feedstocks) and gasoline. Click to enlarge.
Despite a weakening in demand in the OECD due to weaker economic growth projections and a doubling of oil prices over the past year, ongoing supply constraints, refinery limitations and continued demand growth in key emerging markets will contribute to a tight market over the medium term (to 2013), according to the Medium-Term Oil Market Report (MTOMR 2008) just published by the International Energy Agency (IEA).
The current high prices in the market are primarily due to demand-supply fundamentals, not to speculation, according to the report.
Poor supply-side performance since 2004, in the face of strong demand pressures from developing countries, has forced oil prices up sharply to curb demand. These pressures have been exacerbated by refinery tightness, which limits the flexibility of the industry to meet the structurally strong demand growth for middle distillate fuel. While recognising that speculation can have a day-to-day impact on price moves, the fact that all producers are working virtually flat out and that there is no sign of any abnormal stockbuild gives a strong indication that current oil prices are justified by fundamentals. Similarly, while high forward prices may reflect concerns about peak oil or sustained demand growth, they too could only impact spot prices if they started to create a forward price premium sufficient to encourage stockbuilding.—MTOMR 20008
Oil demand remains concentrated in developing economies, with 90% of the growth spread between Asia, South America and the Middle East over the five years of the forecast. Of this, China and India account for almost half. MTOMR projects global demand for oil products will grow by an average of 1.6% per year to 2013, from 86.9 mb/d in 2008 to 94.1 mb/d. Demand growth will be weakest in the first two years of the period, building as global GDP growth strengthens from 2010 on. This pattern is “diametrically opposed” to the trends in supply.
By contrast, demand growth in OECD countries is expected to contract slightly over the next five years, albeit with modest growth continuing to be seen in the transportation sector. Globally, growth is concentrated in a small number of products, particularly middle distillates, and those associated with the petrochemicals industry (NGLs and naphtha), providing an ongoing technological challenge to the refining industry.—MTOMR 2008
Transportation, the MTOMR notes, will remain the main driver of world oil demand growth in the medium term. Transportation fuel demands increases by almost 2% per year on average over the forecast period, with their share of total oil demand rising slightly, from 58% in 2008 to 59% in 2013.
By the end of the forecast period, global oil demand will be almost evenly split between OECD and non-OECD countries. Non-OECD demand will account for almost 49% of total global demand in 2013, compared with 36% in 1996, because of much faster growth when compared to OECD countries. Non-OECD demand could for the first time ever surpass consumption in mature economies by around 2015.
|World supply capacity growth. Click to enlarge. Source: MTOMR 2008
On the supply side, growth from a concentration of new project start-ups during 2008-2010, allied to weaker economic growth, sees potential spare capacity rise in excess of 4 mb/d. However, this expansion slows from 2011 onwards when global demand growth recovers, leading to a narrowing of spare capacity to minimal levels by 2013.
Since the 2007 MTOMR, the IEA made significant downward revisions to both non-OPEC supplies and OPEC capacity forecasts. Project delays averaging 12 months, coupled with global average decline of 5.2%— up from 4% last year—are the factors behind these revisions. Over 3.5 mb/d of new production will be needed each year just to hold global production steady.
Non-OPEC crude supply will remain at or below 39 mb/d over the next five years, with the majority of the 1.2 mb/d of non-OPEC liquids growth coming from NGLs, condensates and biofuels.
An anticipated 8.8 mb/d of crude distillation capacity will be added to the refinery system by 2013. However, with costs doubling over the past five years, planned expansions are put under regular financial scrutiny and projects are subject to ongoing slippage and are vulnerable to changes in refining margins. With 48% of global product demand growth over the next five years concentrated in middle distillate fuels, generating sufficient product to meet demand will continue to be a challenge, according to the report. Further, investment in upgrading capacity will lead to tighter fuel oil markets and will expose the heavy end of the barrel to strong additional pressures from tight LNG and coal markets.
Although biofuels will add to supply growth, increasing from 1.35 mb/d in 2008 to 1.95 mb/d by 2013, announced capacity additions may be difficult to achieve given available feedstock and growing concerns due to rising food prices.
Medium-Term Oil Market Report (MTOMR) - July 2008