From the standpoint of how market conditions could evolve, purely economic consideration of the US points to sluggish demand for energy there. It may be worth revisiting the last comparable period of US economic difficulty that ran from 1980 to 1986. While the onset of a strong economic recovery during this six-year period may be traced back to 1983, energy demand kept falling on the back of conservation and average oil prices tumbled sharply in 1986.
In other words, any onset of robust growth in the US will in all probability muscle oil demand into expansion. But, if history is anything to go by, oil prices may take longer to revive than economic growth. Amid a retrenchment in net imports and domestic demand, the US oil market is oversupplied. The price of crude plunged on Friday as the US energy department reported that US stockpiles rose more than expected last week, which points to weak fuel demand.
The US is the world's largest consumer of oil with a 23 per cent share of the global total last year. It is also its biggest importer, bringing in 60 per cent of its total consumption. Since December of last year, its net imports - imports less exports - of crude oil and petroleum products have been falling steadily; last August, they were at their January 2000 trough when Brent crude was at US$27 a barrel.
Along with this sluggish demand, the US supply of crude oil, the world's third-largest after Saudi and Russia, continues to rise with little prospect of it soon shifting into deficit. In fact, net domestic supply - total supply less net imports - is about the same level of its December 2003 peak when oil was at just $30 a barrel. If these figures are indicative of how oil prices will pan out in the near term, then one may suppose that the oil market may be susceptible to a harsh correction this winter.
Bringing this into sharper focus, the supply-demand imbalance in the world's largest buyer of crude oil and its experience in the period from 1980 to 1986 could easily suggest that oil's next move is on a downwards leg. It would be easy - but wrong this time - to reach that conclusion. The rogue aspect in the current situation is rising demand from Asia. This explains why trying to meet in part this surge in demand, Saudi Arabia has embarked on a US$100 billion (Dh367bn) upgrade of oil and gas production and refining.
Last week, the International Energy Agency revised upwards its estimates of global oil demand which is now likely to feature growth in the current quarter compared with the fourth quarter last year, after five quarters of decline. News on rising Chinese imports in particular helped oil prices. Chinese net oil imports hit 4.47 million barrels per day (bpd) last month, slightly below the record of 4.62 million bpd last July. That counters earlier calculations which, seizing on the vast 1 million bpd Chinese inventory build-up for July, noted that Chinese imports were likely to underperform the normal response to GDP growth.
Investment buying, too, may reinforce a stronger Asian demand. After all, expectations are not divorced from global fundamentals and do feed back into one another. What all this means for the spot market for oil is that, while it is subject to a whole lot of volatility on the back of speculative trading, it may well diverge from US economic fundamentals this winter. Dr Salwa Hammami Labib is a senior economist at Arqaam Capital
