Oil prices unlikely to dip sharply: report

Weak economic outlook in the United States and China, the world’s largest crude consumers, has pushed down oil prices below $80 but a sharp fall remains unlikely, a London-based energy centre said on Wednesday.

The decline was also precipitated by a warning by the International Energy Agency (IEA) that there are downside risks about global oil demand, the Centre for Global Energy Studies (CGES) said in its monthly oil report.

“Oil prices have once again failed to stay above $80, an indication that a full economic recovery is not yet in the bag,” said the report, sent to Emirates 24|7.

“The recent slide was in large part due to a weaker H2 economic outlook for the world’s two largest oil consumers, the US and China.”

In the US, attention focused on the Fed’s most recent downbeat prognosis for the economy, which accompanied the announcement that the central bank would maintain its bloated balance sheet in an effort to provide more monetary stimulus, said CGES, which is run by former Saudi oil minister Sheikh Zaki Al Yamani and comprises several former Opec officials and experts.

Meanwhile, China’s expected slowdown continues, the report said, adding that the country’s oil imports fell 900,000 bpd in July versus June, while industrial production and fixed asset investment also declined on a month-on -month basis.

Weakening equity markets in the US and Japan, as well as warnings about the risks to oil demand growth helped no doubt to skim some of the expectations froth from the oil market, CGES said.

“However, it is unlikely there will be further large price falls… although the dreaded double-dip recession remains a remote possibility, the oil market will find support from the Organisation of Petroleum Exporting Countries for its unspoken aim is to defend an oil price of $70 a barrel,” it said.

“China’s rapid economic expansion is slowly beginning to cool. Although this is hardly surprising, not least because of the statements from policy makers in Beijing at the start of the year that they would temper an overheating economy, it put considerable downward pressure on the oil price last week.”

The report noted that the trend more recently has been confirmed, among other sets of data, by a sharp drop in oil imports in July, month-on-month.

“The slowdown is no disaster: what with official inflation figures running at 3.3 per cent (we believe the actual rate is probably much higher) and price bubbles present in certain sectors such as the property market, such a development might even be beneficial in the long term,” it said.

“For now, however, it means China's oil consumption growth will probably continue to wane and this should help keep prices below $80/bbl for the time being. Moreover, it is a stretch to believe that the headwinds retarding China’s growth are solely the work of officials in Beijing.”

The report said another major contributory factor must certainly be the weakening outlook in the US, a key trading partner.

“The fact that the US jobless rate has remained stubbornly high at 9.5 per cent is limiting consumer spending and businesses’ willingness to invest. Not only does this reduce US demand for Chinese imports, affecting in turn China’s oil demand, but it will also ensure that the US demand for oil remains stagnant,” it said.

“This monetary easing will almost certainly weaken the US dollar further and although this should boost exports in the longer-term, in the short run key US imports like crude oil will become more expensive, causing the so-called J-curve effect by which the balance of trade deteriorates further before it begins to improve - another headache at such a crucial juncture for the US economy.”

The report said because of such an outlook, it is surprising that the IEA has upped its oil demand growth forecast for 2010 to 1.8 mbpd.

“Our medium-term work, based on a detailed analysis of 80 countries, predicts this year’s oil demand growth at under 1.4 mbpd, a much more realistic figure, particularly in the light of faltering economic growth in the world’s two largest oil consuming countries,” it added.

Follow Emirates 24|7 on Google News.