Oil demand set to pick up

High demand could depress spare capacity, push up prices: Analyst

Oil demand is expected to strengthen in the next few years as the global economic continues to recover and Asian markets consume more crude, according to an expert at the prestigious Oxford Institute for Energy Studies.

Bassam Fattouh, Academic Director of the Oil and Middle East Programme at the British Institute, ruled out an immediate oil supply crunch on the grounds spare crude capacity is still high.

“We are currently living in a world of spare capacity. So, we can’t really talk of an imminent supply crunch. But what we are seeing is a strong growth in global oil demand,” he told an oil conference held over the past two days at the Abu Dhabi-based Emirates Centre for Energy Studies and Research.

“This robust growth in oil demand is originating from many parts of the world. It is coming from China, India, and Asia in general. Even in the US and other OECD countries, we are seeing some recovery as well though from low base.”

Fattouh said the Middle East has also become an important oil consumer because of the rapid population growth and economic expansion.

“We can no longer think of the Middle East as a production region only, but also a center of energy consumption.  If this robust growth in demand continues, and non-OPEC supply growth continues to disappoint, we might see the existing spare capacity starting to decline gradually,” he said.

“The gradual erosion of spare capacity will have implications on oil prices behavior, not only on the price level but also on its volatility, which is as important,” he said, adding that most of the spare capacity is concentrated in Saudi Arabia and other Gulf oil giants.

He noted that in the last few years, most of the growth in global oil demand has been coming from non-OECD countries, with a big chunk of that non-OECD demand originating from China.

“In China, we see more than one trend. The transport sector is an important component but it is not the only one. Demand from petrochemicals is also important. The fact that we are seeing a lot of urbanization and climbing up the energy ladder, the growth in Chinese demand will continue,” he said.

“I think that demand for oil is likely to continue to be robust in the next three to four years.  The uncertainty surrounding oil demand is not about the next three to four years. Uncertainty remains as to what will happen after 2015 or 2016. Will governments through their policies be effective in substituting away from oil?

What about the impact of technological innovations? I don’t envisage a technology that will disrupt the transport sector but there will be a lot of changes at the margin which are both cumulative and irreversible and this will make a difference in the long term.”

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