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29 March 2024

Oil prices hinge on near-term global growth

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By Staff

Oil prices have remained strong despite ongoing global financial turbulence and this was mainly because of the disruption of Libya’s crude supply, lower non-OPEC output and good performance of emerging economies, according to a well-known Arab energy analyst.

As emerging markets depend heavily on exports to developed nations, a slowdown in these nations will ally with domestic problems in emerging economies to stifle growth and this could put pressure on crude prices, said Walid Khadduri, a former adviser at the 10-nation Organization of Arab Petroleum Exporting Countries (OAPEC).

In an article published by the Abu Dhabi-based Emirates Centre for Strategic Studies and Research, Khadduri said world energy markets are currently buffeted by conflicting trends leading to high volatility in prices.

While a spate of economic crises have rocked Western industrialized countries since 2008, there has been sustainable economic growth in emerging economies, mainly China, India, Brazil and South Korea.

Although the shortfall in the growth of advanced economies has had an adverse impact on world energy markets, demand for energy has been rising because of the high rate of economic growth witnessed in emerging economies.

It is noteworthy that energy demand in emerging economies now amounts to almost half of the global demand, Khadduri said.

“It is obvious that volatility in oil and gas prices would affect GCC economies, which heavily depend on oil revenues. However, these countries have not been greatly affected by the abovementioned variables, which have contributed to stability in oil prices this year,” said the Iraqi analyst, who had headed the Nicosia-based Middle East Economic Survey (MEES).

He noted that the OPEC basket crude oil price in February stood at $112.18, in July at about $111.62 and at $106.32 a barrel in August of this year.

“But what about oil prices in the near term…” he asked. ”The answer to this question will depend on whether global economic growth will witness a slowdown, a recession or depression….. Thus, crude oil prices will depend largely on the health of the global economy during 2012, and the demand for this commodity will depend on this as well.”

Khadduri said strong performance of emerging economies could come to an end soon as all of them now confront difficult economic and social problems such as internal migration from rural to urban areas, fluctuations in the exchange rate of their national currencies against foreign currencies that in turn affect their balance of trade; and the fact that export markets of these countries are concentrated in Western industrialized nations.

“Therefore, recession in the markets of advanced Western economies will sooner or later hurt the exports of emerging economies, which play a key role in keeping the growth rates of the latter high,” he said.

“With faltering growth annual consumption of energy would eventually fall. The situation of these countries is unlike the US, which depends on its developed domestic market to consume its products and services.”

Khadduri said that despite bleak global economic conditions that should have brought down energy demand, the world has witnessed an increase in the demand for oil, with prices remaining range-bound in 2011.

“There have been several factors that have impacted the supply-demand equation, including the decline in Libyan supply even though some OPEC members increased their production (Saudi Arabia, UAE and Kuwait) by estimated 170,000 bpd, and the release of strategic reserves by some member states of the IEA, amounting to 60 million barrels,” he said.

“On the other hand, the shortage in oil supply from non-OPEC countries helped in maintaining price stability. Japan’s demand for petroleum and gas products also increased to make up for the energy shortfall after the Fukushima disaster and the closure of its nuclear reactors generating electricity.”

Citing independent data, he said non-OPEC oil production declined during 2011 by more than 600,000 barrels per day, due to fall in the North Sea oilfields production (the British and the Norwegian sections) and due to some technical problems in Canadian oil shale. In addition, political issues facing oil export from the Caspian Sea to Europe led to delays in timelines of these projects, he added.
On the other hand, commercial production of shale gas in the United States led to a radical and fundamental change in the global gas industry, and even in global gas prices, as the United States—the largest importer of liquefied natural gas (LNG) in the world—began to export gas to Britain.

“The decline in demand and significant increase in the production of some OPEC states, in addition to the decision of the IEA to use its strategic reserves and to market some of them in the summer months, struck a balance between the supply and demand dynamics in global markets during the summer,” he said.

“These factors also helped stabilize the commercial oil stocks of the member states in the Organization for Economic Cooperation and Development around its average for the past five years, despite disruption in Libyan oil supplies. It is well known that the level of commercial oil stock is an important indicator in market estimates of oil prices and how high or low they are.”