Weekly Fundamentals - Oil Dropped as IEA Lowered Demand Forecast

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Oil prices slumped on Friday after the IEA downgraded its global oil demand from 2012 for a 6th consecutive month and the economic outlook is 'darkening'. The agency forecast that oil demand this year will reach 89.9M bpd, up +0.8M bpd from a year ago. This was revised from January's forecast of 90.2M bpd. Despite the downward revision, the IEA's estimate remained the highest among the 3 major oil agencies (DOE/EIA: 89.3M bpd; OPEC: 88.8M bpd). The IEA stated that 'it's a pretty remorseless picture of decline for oil demand throughout the OECD... These are mature markets, in which industry recovery is stuttering, and moving into recession in the case of Europe'.

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Separately, the IEA commented on recent tensions over Iran and China's oil demand. The agency believed that sanctions against Iran have strengthened China's bargaining position with the Persian Gulf state for oil purchases. Although China's purchases of Iranian oil halved the amount of last year due to price issues, the unsold supply in Iran after the EU embargo might force it to sell it at lower prices to buyers.

China's strategic petroleum reserve program remains underway, the IEA expected the world's largest energy consumer will complete construction of two strategic petroleum reserve sites, the Jinzhou depot with 18.9M bbl of capacity and the Tianjin depot with 22M bbl, in the first quarter. Sites at Dushanzi and Lanzhou, each with a capacity of 18.9M bbl were operational in the second half of 2011 while four more sites under this second phase of the stockpile program will be operational by early 2013. China's plan of the strategic petroleum reserve program is to ensure oil supply and to reduce exposure to international price fluctuation. The first and second phase of the program is expected to provide the country stockpile capacity of about 270M bbl. China aims to boost its emergency capacity by 500M bbl and this will be achieved by completing a third phase by 2016.

The DOE/EIA also provided its outlook on natural gas. The agency forecast that natural gas consumption will average 68.5 bcf/day in 2012, up +1.6 bcf/day, or +2.4% from 2011. Consumption 'increases in all sectors, with the largest volume increase coming from the electric power sector'. Consumption will then rise to 69.7 bcf/day in 2013. Concerning production, the EIA forecast the growth rate will moderate from in 2012 and 2013 from 2011 as 'low prices reduce new drilling plans'.

Natural gas remained under pressure during the week. The DOE/EIA reported that gas inventory dropped -78 bcf to 2 888 bcf in the week ended February 3. Stocks were +714 bcf above the same period last year and +714 bcf, or +32.8%, above the 5-year average of 2 174 bcf. Separately, Baker Hughes reported that the number of gas rigs fell -25 units to 720 in the week ended February 10. Oil rigs climbed +18 bcf to 1 263 units and miscellaneous rigs dipped -1 unit to 6, sending the total number of rigs to 1 989 units. Directionally oriented combined oil, gas, and miscellaneous rigs fell -2 units to 217 while horizontal rigs decreased -3 units to 1 171 and vertical rigs fell -3 units to 606 during the week.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Commodities

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