U.S. Oil Demand Off; Flat Global Demand Predicted

The following Globe and Mail report highlights global oil demand reduction including the well known U.S. first half reduction of roughly 4%.  Note that this drop in oil use came while the price was rising but for most of the period had not reached anywhere close to the  $147 level it eventually attained.   Note also that the 800kb/d U.S. drop is an average for the 6-month period - clearly the drop was increasing and so the running rate now could be a good deal more.

I heard a new word at a dinner party last night: “staycation.”   Then today I read the same word in a newspaper.  It means having a vacation at home, of course.  That’s an interesting straw in the wind.

And then there is this amazing prediction quoted below: ““When all is said and done we wouldn’t be surprised to see very little global oil demand growth over this year and next,” said Vince Lauerman of Geopolitics Central, an energy consultancy in Calgary.”  Flat global oil demand in 2009?   I have no idea, but if it were true, I suspect we would see oil well under $100.

Production is scheduled to increase in 2008 and 2009 well beyond the global 3.5 mb/d decline rate that is predicted.  So flat demand would either flood the market or significantly increase spare capacity.

I think the price of oil over the next 12 - 24 months is all about demand.   New supply is pretty much baked in.  The writer of the piece below suggests that U.S. consumption will not rise even if/when gas prices fall significantly because buyers of efficient cars are unlikely to back to big ones.    I rather suspect gas usage will creep back up if it costs under $3 -  $3.25, but a continuing economic downturn might make demand stay down.

U.S. learns quickly to live with less oil

PAUL HAAVARDSRUD

From Wednesday’s Globe and Mail

CALGARY — Hard evidence is mounting that record oil prices are eating into global energy demand as consumers balk at absorbing the higher costs, two leading energy agencies say.

The U.S. Department of Energy said Tuesday that oil demand in that country recorded the biggest drop in 26 years in the first half of 2008, falling by an average of 800,000 barrels a day from the same period a year ago. For the world’s biggest energy user, it was the steepest decline since consumption tumbled during a recession in the early 1980s.

The International Energy Agency (IEA), meanwhile, confirmed that the U.S. consumer is starting to shun travel in an effort to cut costs. The IEA now expects a combination of high crude prices and a slowing economy will lead to a 3.1-per-cent decline in U.S. oil demand this year followed by a 2-per-cent drop in 2009.

In Canada, there was a statistical counterpoint to reports of ebbing U.S. oil demand when Statistics Canada reported Tuesday that energy exports helped boost the country’s trade surplus with the rest of the world by 11.5 per cent in June.

As oil prices soared over the past year to a record $147.27 (U.S.) a barrel in July, economists have searched for signs that high costs are starting to curb demand. Now, anecdotal evidence that consumers are reining in spending is being supported by economic data that show energy usage is indeed waning.

“When all is said and done we wouldn’t be surprised to see very little global oil demand growth over this year and next,” said Vince Lauerman of Geopolitics Central, an energy consultancy in Calgary.

With the U.S. consuming more than a fifth of the world’s oil output, the driving habits of American motorists are being studied for clues to pending global oil demand. On the back of a continuing drop in U.S. vehicle sales, which fell 19 per cent to a 16-year-low in July, the IEA estimates that U.S. gasoline demand may well have peaked in 2007.

“Even if retail prices ease, it seems unlikely that motorists who have purchased smaller cars will revert to gas-guzzling vehicles,” IEA economists wrote in a monthly report on oil markets. “Nevertheless, the transition to a more fuel-efficient U.S. fleet will take some time.”

The Canadian trade surplus rang in at $5.8-billion (Canadian) in June, up from $5.2-billion a month earlier.

Buoyed by boom-time commodity prices, Canadian companies exported merchandise worth $43.2-billion in June, up 3.1 per cent from a month earlier, Statscan said.

Since then, however, commodity prices have pulled back as expectations for a softening global economy have taken hold.

Oil prices, for example, closed at $113 (U.S.) a barrel Tuesday, off 23 per cent from the peak.

Indeed, the June trade report was likely the high-water mark for Canadian exporters, said Michael Gregory, a senior economist at BMO Nesbitt Burns.

“This probably was the best of all possible worlds,” he said. “In a couple of years time when things settle down we’ll point back and say that was the peak and we’ll all be trying to analyze when we get back to that peak again – which I think we will.”

In June, energy exports to the U.S. rose to $12.8-billion from $11.5-billion in May. The increase, however, was based more on high crude prices than increased sales.

Over all, prices for Canadian merchandise rose 4.5 per cent, while total sales volumes declined 1.4 per cent.

Posted in Categories: Canada, Commodities, Contributor, External Research, USA.

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