/ 11 November 2011

Oil price spikes on improved outlook

Global oil prices have surged almost 30% from an eight-month low of $75 a barrel indicating a surprising improvement in global economic expectations.

Global oil prices have surged almost 30% from an eight-month low of $75 a barrel in October, indicating a surprising improvement in global economic expectations.

This week the Organisation of Petroleum Exporting Countries (Opec) adjusted its medium-term demand outlook and estimated that, by 2015, global oil consumption would increase by 5.3% after a ‘swifter than expected” economic recovery. Opec expected that demand in China would increase to 11.6-million barrels a day, from 9.6-million this year.

The global oil price is dependent on supply and demand. China’s growing appetite for oil continues to put a squeeze on the market and has helped drive prices higher, reaching $115 a barrel this week.

David Sineke, oil research analyst at petroleum company Engen, said China was entering its winter period during which it ran short on diesel and started buying diesel and crude oil, driving both prices higher. In July last year China became the world’s second-largest oil consumer.

Recent refinery shutdowns in China are also reported to have added pressure to global supply. Reuters reported that China’s 240 000 barrel a day refinery, Huizhou, would resume production this week after a month-long maintenance shutdown, but noted that its largest offshore oil field, Penglai 19-3, would remain closed.

Sineke said it was simplistic to relate the rise in global oil prices to the shutdown of one Chinese oil refinery. But what did tend to drive oil prices up was the general closure of major refineries in the northern hemisphere for maintenance during winter.

Sineke said the price increase could not be attributed solely to China as oil reached $147 a barrel in July 2008. Essentially what drove oil prices, he said, were ‘oil fundamentals”, such as the closure of the Libyan oil fields early this year, speculation, when investors held oil back in anticipation of a higher price movement, supply and demand, and the role of Opec.

James Zhang, a commodity strategist at Standard Bank in London, said global inventories had experienced depletion since mid-year. The biggest concern was what would happen with the eurozone debt crisis. ‘It could bring the demand down and we could see the price drop again.”

Zhang said the oil price indicated that concerns of a recession in the United States had dissipated.