More Bearish Economic Trend Negatively Impact Oil Demand  

(MENAFN - Arab News) Syed Rashid Husain

Despite the calls to open taps, OPEC continues to tread a cautious course. With the world oil demand projections put forward by various stake holders falling into a still more widening range, global economic woes coming to surface finally and the crude prices falling, uncertainty in the market seems steering the OPEC to maintain the status quo.

Global markets are definitely in a spin, with some hinting at a recession down the road. Doubts about the global crude demand growth are now being circulated.

"We are headed toward a major recession,' Abu Dhabi-based veteran economic journalist Arshad Hussain, former commerce editor, Morning News, Dhaka and former managing editor, Gulf Commercial Abu Dhabi and editor World Times, London. "This is a patchwork economy, run by the successive Fed chairmen, from Mr. Greenspan to Mr. Bernanke, and this cannot go on. This facade has to crumble," he said. He underlined that in the past, only major wars of global scale have been able to bring the global economy out of the recessionary woes.

With the woes of the global economy surfacing, are we slowly getting sucked into the same phase? Has the current bull run in the global crude markets contributed to the wobbling of the global economy? Pertinent questions indeed, with major implications, far and wide.

And if that happens, the crude markets would almost be the first to hit. And OPEC hesitation is thus understandable.

Fears about the global economy are now beginning to be expressed all around. Some are already arguing that problems in the US subprime mortgage sector are only the tip of a much larger problem and that their repercussions for the world's largest economy could be severe. A sharp downturn in US economic growth would have an immediate knock-on effect in China, where growth is driven by exports and export-oriented investment, both of which would be hard hit by a slowdown in US consumption. In this case, oil demand growth could evaporate even in the booming economies of Asia, the CGES argued.

"The liquidity crises may be bigger than many realize," seconded Nauman Barakat, senior vice president at Macquarie Futures US. "Also, the dollar strengthening and gold collapsing are negative signs for energy markets overall." Oil's drop this month also followed data showing slower growth than expected in the US service sector and job creation, concern about the subprime crisis and selling of oil futures by speculators, OPEC said.

The London-based Center for Global Energy Studies (CGES) puts the onus on oil too for the current global economic woes. The impact of high oil prices on the global economy is clearly evident, it says. "The Bank of England has raised interest rates five times in less than a year, while the US Federal Reserve increased rates 10 times during 2005 and 2006. Inflation has been rising around the world as high energy prices are finally feeding through to other sectors," the CGES says in its August Monthly Oil Report.

"OPEC's supply restraint, initiated at the start of the past winter, has been extremely effective at forcing a drawdown in global oil inventories. Four years of high, and rising oil prices have taken their toll on global oil demand growth and look set to continue to do so," argued the CGES in its monthly report.

The CGES argued that "the spilling over of problems in the US subprime mortgage market into global stock and commodity markets has further weakened our view of demand growth."

Oil pries fell last week as worries over the US sub-prime mortgage sector battered global markets. Problems in US credit markets and the growing unease over the health of the US economy helped the US crude considerably nosedive below the Aug.1 record of $78.77 a barrel.

OPEC last week also warned that a slowing US economy and fallout from the subprime mortgage crisis could cut oil consumption in the rest of 2007. The Vienna-based organization cut its estimate for US economic growth this year to 1.9 percent from the 2.1 percent projected in July and warned of growing doubts about the outlook. "The downside risks to the US outlook have increased during the past month casting doubts on the expectation of a gradual US economic recovery in the second half of the year," the report added.

In its monthly market report, OPEC repeated its view that major consumers have enough crude stocks, despite calls for more oil. The report is OPEC's last before it meets on Sept. 11 to set supply policy.

With the economy apparently starting to falter, it would be wrong to say that the crude demand would stay untouched by the changing winds. And with the crude market demand growth definitely not as robust as in past, the possibility of OPEC taking a very aggressive posture and open its taps further appear minimal. The possibilities are that OPEC in its next meeting on Sept. 11 would adopt a more cautionary, wait-and-see policy.

But it could indeed be hazardous professionally to gauge OPEC moves in advance.