Oil: Oil looks to be defying gravity. With rich-nation growth slowing to a crawl, crude should be getting cheaper. Instead, at $112 a barrel, Brent oil is only just down on recent peaks. While Chinese demand remains strong, crude looks susceptible to a sudden reversal.
A dour forecast from the Organization for Economic Cooperation and Development underscores the prevailing economic gloom. The top industrialized countries are expected to grow just 0.2 per cent in the run-up to the end of the year. Even Germany — Europe’s powerhouse economy — is expected to shrink 1.4 per cent in the final quarter of 2011. The world’s largest gas-guzzler, the United States, is on track to expand by a mere 0.4 per cent over the same period.
Oil traders, however, have barely flinched at the well of bad data. Brent crude has fallen just 11 per cent from its latest high of around $126, reached at the end of April. Oil bulls can point to extenuating factors. Early euphoria over a return of Libya’s 1.6 million barrels a day has given way to more sober expectations of how fast output can be restored.
Meanwhile, China and India combined are expected to increase their consumption of crude by up to 700,000 barrels a day in both 2011 and 2012, according to the International Energy Agency (IEA). Limited OPEC spare capacity — estimated by the IEA at just 3.3 million barrels a day — will cushion any fall.
Yet, rich nations still gobble up just over half the world’s oil. Export-oriented economies will find it hard to maintain breakneck growth if developed markets are stagnant. IEA calculates that if the global economy slows from an expected 4.4 per cent expansion in 2012 to three per cent, demand for oil will more than halve. Rising output from nations such as Brazil and Colombia adds to the bear case.
But, things could easily snap. Price pressure will grow if economic gloom continues to mount. The longer the prices of oil remains elevated, the more it will strain growth prospects. With few signs of the Arab spring disrupting bigger producers, the rosy economic picture implied by Brent crude above $110 barrel is getting harder to justify.
