Oil Bear Market Seen as Temporary on Growth, Demand

Shell CEO Peter Voser
Peter Voser, chief executive officer of Royal Dutch Shell Plc. Photographer: Munshi Ahmed/Bloomberg

Oil-supply constraints amid continued global economic growth mean that crude’s slump to the lowest in eight months may be temporary.

Oil, which has entered a so-called bear market after sliding more than 20 percent since May 1 in New York, is unlikely to collapse as it did in 2008 because long-term fundamentals haven’t changed and supply may not keep up with demand, according to the chief executive officer of Royal Dutch Shell Plc. It’s “irresponsible” to say recent worse-than-expected economic data has significantly changed the market outlook, the head of the International Energy Agency said.

“The softening of the oil price at the moment is a reflection of some of the geopolitical issues being less dominant and the lower demand outlook,” Shell CEO Peter Voser said yesterday at the World Gas Conference in Kuala Lumpur. “The long-term fundamentals haven’t changed, which means that most probably, given energy-demand growth in the world in the longer term, supply will struggle to keep pace.”

West Texas Intermediate oil futures traded as low as $81.21 a barrel this week on the New York Mercantile Exchange, the lowest price since October, after U.S. unemployment rose, Chinese economic indicators missed forecasts and European leaders remained divided on solutions for the region’s debt crisis. Prices dropped from a record high of $147.27 to $32.40 between July and December 2008 as the global recession sapped demand.

Global Growth

“There are still a number of forecasting agencies projecting economic growth of 3 percent to 3.5 percent in 2012,” Maria van der Hoeven, the executive director of the Paris-based IEA said in an interview. “It would be quite irresponsible to say that a few weeks of weaker economic indicators have moved markets altogether. I think you need more facts and figures over the next weeks to give an appraisal.”

The International Monetary Fund raised its global growth forecast for the first time in more than a year in April. The world economy will expand 3.5 percent this year, compared with a January projection of 3.3 percent, the Washington-based IMF said April 17 in its World Economic Outlook. It predicted growth of 4.1 percent in 2013, up from 4.0 percent.

BNP Paribas SA cut its 2012 price forecast for WTI by $7 to $100 a barrel on Europe’s worsening sovereign debt crisis, the bank said in a report e-mailed May 29. Still, prices will advance in the third quarter because of sanctions against Iran and shrinking spare production capacity in the Organization of Petroleum Exporting Countries, the bank forecast.

Demand Volatility

Oil traded as high as $110.55 a barrel March 1 on speculation that international sanctions against Iran threatened supplies from the world’s fourth-biggest producer. July futures were at $84.16, down 0.2 percent, on the Nymex today.

“We’ve seen a lot of volatility mainly on the demand side,” Voser said after delivering a keynote address at the industry gathering. “We’ve had some geopolitical dimensions around the Middle East, in Iran and Syria, following the political tensions in Libya a year ago, so I think that’s reflected in the price in the more short to medium term.”

OPEC is likely to maintain its level of oil supplies when it meets this month even as prices fall, van der Hoeven said in Kuala Lumpur today. OPEC, which controls about 40 percent of global production, will be reluctant to reduce output and threaten the global economy, she said. The 12-member group, with Saudi Arabia as its biggest member, is scheduled to discuss policy on June 14 in Vienna.

‘Triple Digits’

“It’s likely that they’ll be unwilling to do anything that might risk prematurely tightening markets once again at a time of such economic uncertainty,” she said. “We are fairly confident that OPEC’s decision will be as it has been until now, to supply the market as they did.”

Global oil use will increase by 0.9 percent to 90 million barrels a day in 2012, the IEA said in its Oil Market Report last month. The Paris-based agency is the energy adviser to the Organization for Economic Cooperation and Development. Consumer nations welcome lower oil prices, van der Hoeven said.

“We’re still near triple digits and given the economic situation we are in and some local-currency weaknesses, there is still this huge burden on domestic and national budgets,” she said. “Lower prices are easing the situation but it does not mean this should be jeopardized.”

Iran has lost about 300,000 barrels a day of oil exports because of the international sanctions aimed at curbing the Persian Gulf nation’s nuclear program, according to van der Hoeven. A European Union embargo is due to take effect July 1 and will remove a total of 1 million barrels from the market, the IEA estimates.

Stockpile Release

“There is some evidence of producers making extra oil available for China and other Asian buyers,” van der Hoeven said. “I am quite confident that the market is already preparing for what might be the full impact when the Iranian sanctions come.”

The IEA is still ready to coordinate a release of emergency oil supplies from members’ stockpiles even if prices have fallen. The energy adviser coordinated the sale of 60 million barrels of crude and refined products last year after supplies from Libya were disrupted.

“When you have a collective action in stock release, you bring more liquidity to the market because there is a disruption to supply,” she said. “Now there is no physical disruption to supply but if necessary there is always the opportunity to act. We did it more than once, we stand by.”

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