Economic turbulences are shaking oil demand

Jan 23, 2012 12:00 AM

After posting gains of over 25 % in 2010, the same trend continued and the oil prices registered a further gain of 26.2 % in 2011. For 2012, oil outlook is anything but clear, as macroeconomic, geopolitical and physical supply demand factors all seem to point in different directions.
Economic turbulence is shaking oil demand as the slowdown hits manufacturing activities worldwide.

According to a report by Global Investment House (Global), slow oil demand, initiated in the OECD region, has moved to China and India, leading to a downward revision in next year's oil demand growth forecast.
Other regions are also expected to experience an economic slowdown, including countries like Brazil and several Latin American economies. Hence volatility in oil prices and average prices in 2012 would maintain at the same level as they were in 2011.

High oil prices and steady production levels fuelled economic growth in the region. Energy sector continued to dominate GCC countries' revenues despite rigorous diversification efforts made by these economies to develop the non oil sectors. In order to continue to benefit from previous high oil prices, GCC countries are focused on expanding their output by adding various new products to their offerings.
The Global report said the total value of planned projects in the regional petroleum sector is estimated at $ 353 bn. Despite this optimistic scenario, project postponement and cancellation trend continues to plague the market.

Saudi Arabia currently has approximately 147 projects upcoming in the petroleum sector, with an estimated cumulative value of SAR 806 bn. These projects are focused heavily on the upstream oil and gas segment.
One of the major upcoming projects is the Yanbu Integrated Refinery & Petrochemicals Complex that is currently in the study phase and has an estimated budget of $ 20 bn. Another major upcoming project is the Jazan Refinery Project that has an estimated budget of $ 7 bn.

UAE currently has roughly 116 projects upcoming in the petroleum sector, at an estimated cumulative value of $ 98 bn. These projects are focused heavily on the upstream oil and gas segment.
One of the major upcoming projects is the Tacaamol Al Gharbia Chemicals Industrial City project that is currently in planned phase, and has an estimated budget of $ 20 bn. Another major upcoming project is the Zadco and has an estimated budget of $ 10 bn.

Emerging markets are increasingly becoming the drivers of growth in the global economy as mature and developed markets struggle with slow or even negative growth. This is especially true for the petrochemicals industry, which is banking on emerging markets in Asia and elsewhere absorbing new capacity due to come on stream in the next few years.
We believe a major chunk of future demand growth will come from this region and should enable the GCC petrochemicals industry to find a ready market for the output of the aggressive capacity expansion projects currently underway at various locations.

While America has gradually come out of recession as recent economic numbers were quite encouraging the demand from the region would be better than the previous years, Global said. While for Europe there are high chances of economic slowdown leading to recession which will cast shadow on the demand of petrochemical products.
The Global report said that petrochemicals capacity expansion in the developed markets, especially the US, has been muted since the turn of the century.

Natural gas prices which had averaged $ 2 per mm Btu throughout the 1990s have shot to highs of over $ 13 per mm Btu in 2008 and averaged around $ 6 per mm Btu in this decade. With oil prices staying above $ 70 per barrel, naphtha prices have also risen in tandem. As a result, European and US petrochemicals crackers have increasingly found it difficult to compete with low cost Middle Eastern players.
As petrochemicals are commodity products, price is often the single most distinguishing factor. This fact enables low cost producers to outmanoeuvre high cost players.

In consequence, capacity shutdowns in developed markets such as the US and the EU as companies increasingly try to rationalize their capacity portfolio in order to compete more with the low cost producers.
Global said the total petrochemical regional capacity to increase at a CAGR of 2.9 % during 2011-13 with most of the additional production capacity from KSA followed by Qatar. In terms of growth, the capacity expansion from Qatar is expected to increase at a CAGR of 13.4 % during 20011-13. This will reflect positively on the improvement in the regional market share i.e. 14.2 % in 2013 as compared to 10.3 % in 2010.

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