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29 March 2024

Oil prices to see small rise in 2011: IMF

Oil demand will continue to rise as the global recovery progresses. (AP)

Published
By Nadim Kawach

Global economy recovery and the ensuing rise in oil demand, mainly in China, could further boost crude prices through 2011 but it is expected to be only a limited increase, the International Monetary Fund (IMF) has said.

Oil demand will continue to rise as the global recovery progresses, with the buoyancy determined in part by the strength of the expansion in activity, the Washington-based Fund said in its latest world outlook report.

But it noted that any increase in crude prices, which have largely improved this year, would depend on action by the 12-nation Organisation of Petroleum Exporting Countries, which is pumping below capacity to keep prices strong.

“Based on previous patterns in the early stages of expansion after global recessions, some of the recent buildup of oil demand momentum in emerging and developing economies is likely to carry into 2011,” it said.

“While the momentum will put upward pressure on prices, oil futures data suggest that the extent of price pressure will remain limited. On the demand side, despite the likely rapid demand expansion in emerging and developing economies, global oil demand growth is expected to be moderated by stagnation or subdued increases in advanced economies.”

The study said such expectations are consistent both with recent fuel efficiency trends and the estimated relationship between oil demand, activity growth, and real oil prices in advanced economies.

Second, information on upstream investment projects analyzed by the International Energy Agency suggests that, under current execution plans, these projects will provide for a continued expansion in upstream production on the order of 1 percent per year, the report added.

“Though moderate, this pace of expansion can accommodate rapid demand growth in emerging and developing economies without substantial draws on OPEC spare capacity for much of the potential range of demand outcomes.”

IMF’s figures showed oil demand grew more than expected in the first half of 2010, primarily reflecting stronger-than-projected global activity and a rise in China’s demand above what would have been expected on the basis of activity.

Current data showed global oil demand rose by 2.7 per cent on an annual basis in the first half of the year, the strongest year-over-year increase since 2004.

While demand has risen more than expected in advanced and in emerging and developing economies, the latter still account for virtually all the growth.

The figures showed oil demand in China leaped by 14 per cent in the first half of the year, exceeding real GDP growth by some three percentage points.

It said such divergences between oil demand and broad activity growth in China were observed in the past, notably in early 2004, but they seemed to reflect special factors and remained short-lived.

Turning to production, the study said output edged up during the first half of 2010, almost matching the rise in demand.

About half the supply increase is attributable to rises in total production outside OPEC despite production declines in the North Sea and Mexico, it said.

It noted the turnaround in overall non-OPEC production reflected widespread

gains, partly due to the incentives from high prices to ramp up production, including through greater use of enhanced recovery techniques where feasible.

In contrast, OPEC’s production has risen only marginally despite low capacity utilization in some major producers, highlighting the continued need for production curbs to keep prices in the $70–$80 range, the IMF said.

“Overall, however, oil markets have not yet reached a state of full cyclical normalization. With the broadly balanced expansion of demand and supply, the correction of excess cyclical inventories-those above seasonal five-year average levels-in the Organization for Economic Cooperation and Development countries has remained partial,” the study said.

“And OPEC spare capacity buffers remain high despite some rise in crude oil production because capacity has increased even more. The continued upward slope in the oil futures curve is another reflection of incomplete normalization in oil markets….under such relatively benign supply conditions, OPEC production policies would continue to remain an important factor in determining prices. In particular, the price path will depend on (1) the target price at which OPEC members will accommodate an increasing call on their spare capacity, (2) the reservation price at which additional supply would be reduced, and (3) quota discipline among the Organization’s members.”

The IMF said it saw upside risks to that picture, including the fact that relative stability in the oil market could come from the supply side, whereas on the demand side they seem limited to large upward surprises.

“On the downside, demand risks related to risks to the global recovery remain important. In terms of the distribution of risks, oil futures market participants see relatively large price spikes to be more likely than large price drops, although such events remain tail risks,” the report said.

“Supply risk factors with the potential for a sustained impact are likely to come from obstacles to investment projects, for both new and replacement projects, although some geopolitical risks may also have a longer-lasting price impact. High oil prices and lower costs have helped keep capital expenditure at robust levels, supporting an unexpected increase in non-OPEC production despite ongoing declines in the North Sea and Mexico.”

But it added that the oil spill in the Gulf of Mexico has illustrated the risks involved in projects at the technological frontier.

“The production effects of the moratorium on new deepwater drilling in the US part of the Gulf will be small from a global perspective, as deep sea exploration and development elsewhere have continued,” it said.

“Nevertheless, expansion of this segment of unconventional oil production faces risks that extend beyond US borders and safety-related government intervention.