Oil set to decline, but not plunge
Oil just keeps bubbling away. US futures have hit a new record of $114 a barrel thanks to supply disruptions in Nigeria and Mexico and renewed pressure on the dollar: a falling greenback makes dollar-denominated raw materials, a hedge against inflation, look cheaper. Meanwhile, robust Chinese demand – imports rose by an annual 25% in March – has also underpinned the tight market.
Still, as Victor Shum of Purvin and Gertz energy consultancy told CNNMoney.com, while dollar movements are key for now, “the weight of the gloomy economic picture in the US and to a certain extent other countries, is getting heavier”.
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As the US, the world’s biggest oil consumer, enters recession, there are signs that demand is cooling, with JBC Energy saying US petrol consumption is now expected to decline “for the first time in years”. Fitch Ratings notes that a slowdown in OECD energy demand (60% of the total) is “clearly already underway”. And following the IMF’s downgrade of the world economic outlook, the International Energy Agency has reduced its global 2008 demand estimate by 35% since January.
Nonetheless, supply is also rising less than anticipated, notes the IEA, with non-Opec production – which accounts for around 60% of global supply – set to disappoint again this year. In Russia, production growth has stagnated, and one oil executive thinks production may have peaked. There is also the ongoing risk of supply disruptions, notes the IEA. So oil looks due for a slide, but not a large plunge.
