January 18, 2012 7:03 pm

Asia proves bright spot in weak oil market

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Against a gloomy global economic backdrop, one bright spot for the oil market is Asia.

In the first three quarters of last year, consumption growth in China, Japan and elsewhere in the region more than compensated for falling demand in Europe and the US. Asian oil demand continued to climb in the fourth quarter but, for the first time since 2009, the economic might of Asia was not enough to outshine declines in the rest of the world.

Asia oil markets graphic

Asia oil markets graphic

With the eurozone gripped by a sovereign debt crisis and oil consumption in the US sharply down, Asia’s oil markets, dominated by emerging economies such as China, India, Indonesia and Malaysia, have become a lynchpin in helping crude prices hold up.

“The impact of the recession on oil demand in the OECD and emerging markets could not be more stark: The global market for oil is diverging as never before,” Francis Osborne, principal oil demand analyst for Wood Mackenzie, the consultancy, says.

The contrast was evident in the fourth quarter of last year, when Asian oil demand grew by 400,000 barrels a day, while consumption elsewhere in the world fell by 700,000 b/d.

The strength of Asian demand is, therefore, key for the global oil market in 2012. The outlook will rest largely with China, the world’s second-largest consumer of crude. After a year of uneven demand growth in 2011, analysts are predicting a mild pick-up in China’s imports. Outside Asia, only the Middle East and, to a lesser extent, Latin America look set to contribute to global oil consumption growth.

Last year Asia’s demand growth was easily the highest in the world at 720,000 b/d, compared with drops in consumption of 310,000 b/d in North America and another 260,000 b/d in Europe, according to the International Energy Agency, the energy watchdog group for developed countries.

The IEA forecasts that this year Asia’s oil demand growth will be 840,000 b/d, accounting for more than 70 per cent of the world’s total growth. Countries like Indonesia and India, where oil demand was up 10 per cent and 3.3 per cent in 2011, respectively, are among the bright spots.

One of the clearest signs of the strength of Asian demand relative to the rest of the world is the falling price difference between Brent and Dubai crude. Brent is considered a proxy for the balance of supply and demand of the European and US oil markets, while Dubai is seen as better indicator of the Asian market. Although Brent typically trades at a premium to Dubai due to its higher quality, in recent weeks the price differential – or spread – has narrowed to a 14-month low of $2.73 a barrel, down from a peak of $7.61 a barrel in April, when the civil war in Libya left European refiners withouth supplies.

In spite of the strengh of Dubai crude, the oil market in China, the engine of demand in Asia, is not as stellar as it was in the previous decade. Beijing consumed “a relatively modest” 1.7 per cent more oil in November – the latest data available – than in the same month of a year ago, according to Paris-based IEA, in stark contrast with economic growth of 8.9 per cent in the last quarter.

“Throughout 2011 we have seen a slowing growth rate for energy demand in China,” says Janet Kong, managing director of commodities research for CICC, the Chinese bank. But coming months could present a good buying opportunity for Beijing to fill the country’s strategic oil reserve, says Ms Kong.

China’s imports of crude oil in November ticked up to their second-highest level ever thanks to purchases for the strategic petroleum reserve to meet supply emergencies. This year a slew of new refineries set to come online are expected to further boost the country’s demand.

“The biggest swing factor we could get [this year] is from the refining side,” says Soozhana Choi, head of Asia commodities research at Deutsche Bank. She forecasts that China will have more than 700,000 barrels per day of new refining capacity, building significantly on throughput levels of around 9.1m barrels per day in the last quarter of 2011. The IEA is, however, more circumspect, predicting that oil demand will grow this year by just 410,000 b/d.

India, the world’s fourth-largest oil consumer, is also adding new refineries that will contribute to demand. And a cluster of Southeast Asian nations will add more to the consumption, with oil traders hightlighting the role of Malaysia, Indonesia, Singapore and Vietnam.

Additional reporting by Javier Blas in London

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