JEDDAH – The rollout of QE3 will put a floor under global oil prices keeping the risks of a sharp fall to beneath $100 a barrel low, the latest issue of Gulf Oil Review said Friday. But the chances of a rally above the recent range like that seen in Q1 is also limited absent a supply shock or significant upwards revisions to global economic growth prospects, it added. The price of oil is hanging Friday around $92 as investors remain concerned that economic stimulus measures from central banks around the world won't stimulate much oil demand. Benchmark oil rose 14 cents to $91.99 per barrel in morning trading in New York. In London, Brent crude rose 48 cents to $112.49. Oil prices have been supported by economic stimulus measures and tensions in the Middle East, but traders are increasingly focusing on the weakness in world economies that prompted the stimulus measures. Sharp intraday price falls may have been prompted by fresh talk of an US release of strategic oil stocks, but more compelling reasons can be found in recent weaker-than-expected oil demand data from the world's two largest consumers, the US and China. US oil data continues to be overshadowed by the impact of Hurricane Isaac on refining and imports, but reports that US August oil demand fell to a 15-year low suggest the bumpy economic recovery has a long way to go, with an improvement in employment critical to a recovery in oil demand figures. Chinese manufacturing data showed that sector continues to contract while oil imports are running well below year-ago levels. Whether China can join the US, Europe and Japan in a fresh round of meaningful stimulus remains to be seen. Certainly expectations for a comprehensive pro-growth package in China is keeping oil bears at bay for now. Saudi Arabia's preference for an oil price around $100/B and public commitment to do whatever it takes to keep the market well supplied continues to cap the upside. While oil markets continue to watch Middle East political tensions, Iran has managed to increase its oil sales to key Asian buyers and we expect that Iran will increase its exports to around 1.25 million b/d in September, an increase of some 150,000 b/d from August. The risk of military confrontation with Iran remains low as long as the diplomatic track remains open. So the overall picture is mixed: although oil supply-demand balances should ease in Q4, geopolitical jitters, hopes of global economic recovery on the back of stimulus packages, and a weak build-up of inventories will continue to offer some support for oil prices – even if not enough to justify a prolonged rally. Events in the past week have pushed some fund managers to revise their views on oil-market balances, which may in time yield a wider shift in market sentiment. Fatih Birol, Chief Economist at the IEA, said in an interview with the Gulf Oil Review said oil prices above $100 a barrel remain a profound threat to the global economy and China's slowing growth is injecting new uncertainty into world oil demand. Describing current oil prices above $100 as “unbearable for consumers”, Birol highlighted the risks to the European and Chinese economies from high oil prices. “In Europe, the ice is so thin that we could at any moment fall back into recession,” he said. But he said his main concern was what he described as an invisible risk to the global economy – a Chinese slowdown. Describing oil prices as “in the red zone”, Birol welcomed efforts by key oil producers including Saudi Arabia to ensure that the market was stable and well supplied. Looking forward, Birol said field depletion would be a major force in the longer term as major fields became mature and output peaked. Iraq, he said, would be critical to meeting future demand. If it does not deliver “considerable” new upstream growth, he cautioned, global oil markets would head “into troubled waters”. On the prospects for non-conventional oil and gas, Birol said the IEA projected a redefinition of the global energy map as a result of evolving non-conventional energy plays. In terms of the long-term demand outlook, he argued that annual global oil demand trend growth of 1.5mn b/d was now a thing of the past. “We will see two different trends: oil demand growth will continue to fall and stagnate in the OECD countries. But we will see a very strong increase in non-OECD countries,” he said, highlighting the potential for growth of the transport fleet in the developing world. Soaring gas demand and limited success in building out a comprehensive regional gas pipeline network mean the Gulf will over time become a significant consumer of LNG, according to Naji Abi-Aad. Although the Gulf's natural gas endowment is vast, its uneven distribution has yielded different strategies for its use among the Gulf states, which in turn have increased their demand for gas, especially during periods of peak power demand. Regionally, the potential of the gas sector is huge. Eight countries around the Gulf – Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the UAE and Yemen -- hold proven reserves estimated by BP at 79 trillion cubic metres (cm): 38 percent of the global reserves in a region whose population accounts for less than 4 percent of the world total. A large portion of this gas, moreover, is concentrated in a small number of super-giant fields, a fact that has made the development of those structures easier and cheaper. A lot of the Gulf's gas has been consumed locally: as fuel and feedstock for power generation, water desalination, petrochemicals and fertilizers, gas-condensate recycling, oil lifting, and enhanced recovery. Yet the potential for future expansion in regional gas use is also significant. The region continues to see economic and population growth rates far above those in other areas of the world. – SG
