Wednesday, July 21, 2010

Are Oil Producers Nervous About Fall Demand?

By Angela Henshall

Global energy demand remains weak despite staging a hesitant recovery from recession levels. This year’s U.S. driving season -– when Americans leap in their SUVs for their annual vacations -– looks fairly feeble compared to pre-credit crunch years.

Stocks of crude oil and products on both sides of the Atlantic are still stubbornly high, a problem exacerbated by growing supply from producers outside the Organization of Petroleum Exporting Countries control, such as Russia.

Some producers have more than enough crude to sell, but appetite for their oil has waned a little. Values for West African oil cargoes traded on the spot market for example have softened in recent weeks pulled lower by deteriorating refinery margins and higher freight costs which have deterred buyers.

Global cracking margins — the profit a refinery can expect to make from refining crude — are now at five-year lows, temporary strength in margins the market saw in spring has evaporated.

One of Africa’s key oil producing nations, Angola, has dramatically reduced its crude export plan for September. The total volume of September cargoes will be 1.52 million barrels a day, nearly 17% lower than August’s 1.83 million barrels a day, a cut of just over 300,000 barrels a day.

And while part of this can be attributed to outages at the large Girassol and Plutonio fields oil traders say this drop just doesn’t add up.

Traders believe Angola may be holding back some of its supplies for September in anticipation of slack demand from its biggest customers this fall. They suggest it may point to worries over demand from key buyers, namely China.

Angola’s primary customers, the U.S. and China, buy its crude because of its good quality and reliable production. Angola has been able to steadily ramp up its output while Nigeria has struggled to maintain its production from the restive Niger Delta. In the first half of 2009 Angolan crude was the third largest source of Chinese imports 29% of crude exports were sent to China and 31% to the U.S. according to the EIA.

It may be a little hasty to be so pessimistic about demand in the second half of 2010, as the most recent data and indicators for U.S. and Chinese oil demand are still showing solid, if hesitant, growth, says Société Générale Commodities Research, Michael Wittner, global head of oil market research.

Given the ongoing concerns and question marks about economic growth in the U.S. following lower Fed economic forecasts and sharply lower consumer confidence in July, plus European worries over austerity measures, and anxiety over China, it is natural to focus on product demand, however Wittner says; “Despite all the jitters over China, oil demand there has remained extremely robust through June.”

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