Increasing demand for oil products has driven prices up quicker than expected, with China’s rapidly expanding economy demanding more than expected. In turn, OPEC has reduced its production quotas to 24.845 million barrels per day, citing a need to keep prices at desirable levels. See the following article from Money Morning for more on this.
The Organization of the Petroleum Exporting Countries (OPEC) said Thursday that it would keep production quotas at 24.845 million bpd and urge members to adhere to targets, as global demand has yet to return in full.
However, a report from the International Energy Agency (IEA) indicated that demand is recovering more quickly than previously thought, and that OPEC may be playing catch-up as the global recovery gathers steam.
The IEA increased its outlook for global oil demand by nearly 500,000 barrels per day (bpd) for 2009 and 2010, to 84.4 million and 85.7 million bpd respectively.
Perhaps the biggest reason for the increase was surging demand in China, where the Red Dragon’s $587 billion (4 trillion yuan) stimulus plan has resuscitated manufacturing and helped China grow into the world’s largest auto market.
China’s imports of oil hit a record high in July, soaring 18% from the month prior to 19.63 million metric tons, or about 4.64 million barrels a day, according to the nation’s General Administration of Customs.
China’s economy grew by 7.9% in the second quarter, and Beijing estimates 8% growth for the year, compared to an expected 3% dip for the United States.
Chinese demand for oil this year will grow by 2.8%, according to the IEA.
“I am more confident today than what I was back in May,” about China’s economic recovery, Saudi Oil Minister Ali Naimi told Bloomberg.
The rise of China has been a tremendous boon to OPEC – which controls 40% of the world’s oil supply – particularly since the financial crisis has crimped oil demand in developed nations around the world.
“We’re looking East more these days,” said Kuwaiti Oil Minister Sheikh Ahmad Abdullah al-Sabah.
The IEA expects demand for oil in North America to plunge 4.4% this year. However, that figure is an improvement from last month’s forecast of 5.1%, and could accelerate further as the recovery gains momentum.
Data for gasoline and heating oil consumption in June showed a “hefty” increase in demand the IEA said. That data was further substantiated yesterday when the Energy Department reported a larger-than-expected drop in inventories.
Inventories dropped by 5.9 million barrels for the week ended Sept. 4 – more than three times estimates of analysts surveyed by Platt’s, the energy information arm of McGraw-Hill Cos, according to The Associated Press.
Indeed, even Saudi oil minister Naimi has acknowledged the bullish shift in the market.
“You guys must realize that there is a fundamental change in the market,” he told reporters ahead of the night-time meeting that agreed to keep supplies officially unchanged.”Economic growth is the name of the game, that’s what’s going to drive the price. As long as economic growth is there, the price is going to go up.”
Still, OPEC remained cautious, opting to keep production level until demand in the West returns to its pre-crash levels. Of course, that means the cartel will likely be playing catch-up, boosting production behind price increases as the economic recovery gains momentum.
Oil prices have more than doubled from their February lows, closing yesterday at $72.17 a barrel on the New York Mercantile Exchange (NYMEX).
Goldman Sachs Group Inc. (NYSE: GS) has raised its 2009 oil price forecast to $85 a barrel from $65 and said prices would reach $95 a barrel in 2010.
This article has been republished from Money Morning. You can also view this article at Money Morning, an investment news and analysis site.