Commodity Blog

Archive for December 11th, 2008

Global oil demand will contract for the first time since the early 1980s as world economic growth slows to a near standstill, the US government says.
The forecast for 2008 and 2009 is bad news for energy companies and oil producing nations that depend on robust prices, but could benefit cash-strapped consumers by sending gasoline and heating costs lower, according to a US Energy Information Administration report.
World oil demand is projected to fall by 50,000 barrels per day in 2008 and 450,000 barrels per day next year, the EIA said, led by a 1.2 million bpd contraction in top consumer the United States this year a 200,000 bpd drop in 2009.
The report marked the first major forecast for shrinking energy demand tied to the current global financial crisis.
The lower forecast came as the EIA revised down its projection for 2009 global economic growth to 0.5 per cent next year, from the 1.8 per cent projection it made in its previous report issued in November.
“The current global economic slowdown is now projected to be more severe and longer … leading to further reductions of global energy demand and additional declines in crude oil and other energy prices,” the EIA said.
The last time world petroleum demand fell was in 1983, part of four years of straight declines in oil consumption that began in 1980, the agency said.
The weak economy and lower petroleum demand has already caused US crude oil prices to sink from a record $US147 a barrel in July to $US43 on Tuesday — a slump that has rattled energy producing nations like Saudi Arabia, Russia and Venezuela, and triggered massive cutbacks in investment in oil projects like those in Canada’s oil sands.
“The increasing likelihood of a prolonged global economic downturn continues to dominate market perceptions, putting downward pressure on oil prices,” the EIA said.
Demand still is expected to grow next year in emerging economies such as China, which helped drive the six-year rally in oil prices to record highs. Still, the latest EIA report revised demand from this group down by 40,000 bpd.
Price drop
The EIA slashed its 2009 forecast for crude oil prices to $US51 a barrel from $US63.50 a barrel in its previous forecast.
“I don’t think they are done revising. I think next month will be lower. I’m having a hard time seeing GDP growth anywhere — we may see pockets of growth — but not worldwide or regionally,” said Peter Beutel, president of Cameron Hanover, based in New Canaan, Connecticut.
Meanwhile, the World Bank said on Tuesday that the world financial crisis will sharply slow world economic growth next year, ending the five-year global price boom for crude oil and other commodities.
The weaker energy prices could mark a bright spot for consumers who have been hard hit by the financial turmoil.
The EIA said it cut its winter heating oil forecast to $US2.53 a gallon from $US2.75 a gallon, and its 2009 gasoline price forecast to $US2.03 a gallon from $US2.37.
Average US gasoline price are currently running about $US1.70 a gallon, down from a record $US4.11 this summer.
“We’ve lowered the bar for gasoline demand so much that it’s going to take years for it to recover to the type of demand numbers that we had in the past,” Phil Flynn, analyst at Alaron Trading in Chicago, said.

Government interventions, particularly in China, are likely to distort many commodity markets, resulting in even lower prices as producers maintain production levels thanks to government subsidies and tax cuts, Citigroup said in a report Wednesday.
China has reduced electricity tariffs and lowered export taxes to help the aluminum industry, and cut export tariffs on flat steels. India has repealed an 8% export tax on iron ore fines and reduced taxes on lump product to 5% from 15%.
“We believe government subsidies could remain in effect for many years,” Citigroup said. “Just as the developed world seeks to protect and support automotive and banking industries, developing economies will seek to support their relatively new smelting and material industries.”
China has yet to issue coal export quotas for 2009, but the government has removed price caps, a signal that export controls are easing, Citi said.
“Given the sharp slowdown in power consumption, thermal coal exports from China could sharply increase, a major risk to seaborne prices,” the bank said.
Acquisition Spree Renewed
China’s price interventions could also be stepped up as it mulls proposals to build government stockpiles, such as the State Reserve Bureau considering copper, aluminum, steel and other raw material purchases for strategic reserves, Citi said.
Meanwhile, Beijing appears to be encouraging renewed overseas corporate acquisitions to ensure secure raw material supplies in an environment where many companies are struggling to refinance debt and raise funds to develop projects, Citi said.
Only this week, China’s Shenzhen Zhongjin Lingnan Nonfemet Co. (000060.SZ) emerged as the main contender to win control of Australian zinc miner Perilya Ltd. (PEM.AU) by taking part in a A$45.5 million share placement.
Meantime, China’s Yanzhou Coal Mining Co. (1171.HK) is carrying out due diligence on coal miner Felix Resources Ltd. (FLX.AU) ahead of a possible takeover bid, according to a person familiar with the situation.
With increasing debt refinancing issues hitting the metals mining sector, merger and acquisition opportunities are becoming increasingly attractive, Citi said, but many companies and sovereign wealth funds “are still gun shy given losses on existing investments and continued deterioration in economic data, and may wait for a clear picture to emerge on 2009 demand.”

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