Insight: Oil prices have peaked

Ed Morse
Financial Times
Thursday, Aug 14, 2008

Thanks in no small degree to a drop in global demand, oil prices, after breaching $147 per barrel, have tumbled more than 23 per cent to below $113. Barring a big hurricane in the Gulf of Mexico or a disruptive geopolitical event, oil prices appear to have peaked.

World oil consumption is now growing at a significantly lower pace than had been imagined a year ago. Last October, the International Energy Agency was forecasting global demand growth for 2008 of 2.1m barrels a day, with 750kb/d from the OECD and 1.33mb/d from emerging markets. In their latest monthly report, the IEA has slashed this by more than 60 per cent to 800kb/d, with OECD demand actually forecast to decline by over 600kb/d and emerging markets demand to grow by 1.4mb/d.

In our judgment, the IEA’s forecasts for emerging markets will turn out to have been far too optimistic by year’s end and OPEC countries will again complain about the inability of oil importers to guarantee sufficient demand growth to warrant investments in expanded production capacity.

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Pointing fingers about who is responsible for the uncertainty of global demand may be futile. Clearly, higher prices and lower economic growth are taking a toll on US and other OECD country petroleum product demand. But now two other articles of faith are being challenged. First, the consensus thinking that emerging market oil demand has decoupled from industrial countries will be severely tested over the next half year. Second, the growing consensus that lower prices and higher economic growth will result in a rebound in global demand growth is wishful thinking.

Let’s look at both of these arguments in more detail. There is growing evidence that the economic malaise affecting many of the OECD economies is spreading into emerging markets, especially those whose growth is reliant upon the strength of their export markets.

For China, which has been responsible for more than half of global base metal demand growth and as much as one-third of global petroleum demand growth, challenging times are ahead for exporters and the metal and energy-intensive producers of steel, aluminium, cement, and other primary products.

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