North American oil production growth was at the centre of market attention when the year started and there was widespread expectation that prices would come under downward pressure even as demand growth was set to trail supply growth.

Well, eight months down the line, oil prices have actually fallen, but not wholly because of the US production surge but also following increase in supplies from other origins, especially Libya. Additionally, despite the US’ positive macro data, global economic weakness still persists. The OECD’s leading indicators point to stable growth momentum in the OECD area and a mixed picture in large emerging economies.

No wonder then that oil prices have fallen sharply. Last week, Nymex crude declined to $94 a barrel from $ 96/b a week earlier and $102/b a month ago. This time last year, the price was $109/b. The fall is significant in the context of continued geopolitical uncertainties.

Indian, Chinese demand For emerging economies such as China and India that are largely dependent on imports for meeting energy needs, the price fall is absolutely welcome. In particular, India’s consumption needs are seen rising rapidly given the new found optimism over economic activity in the country in recent months. OECD lead indicators for India point to growth gaining momentum.

Although China is far ahead in terms of quantum of oil import and consumption, it is interesting that Indian oil demand has been growing faster than China’s in the last several months. “In absolute terms, Chinese oil demand (9.8 million barrels per day) is more than double the Indian demand (3.5 mb/d); but data for this year available until July show Indian oil demand growth (101,000 barrels a day) has outpaced Chinese demand growth (-62 kb/d),” Miswin Mahesh of Barclays Capital said in a report.

Indian oil demand growth has accelerated this year, growing at an average of three per cent so far, relative to the 1.8 per cent over the second half of 2013. At the same time, Chinese implied oil demand has struggled to recover from the second half of 2013 when growth was 0.3 per cent, and has instead declined on average by 0.6 per cent this year, he added.

In terms of diesel demand too, contrasting trends have emerged between the two countries. India’s diesel demand recently reached a record 1.56 mb/d while Chinese demand has fallen by one per cent this year. Healthy construction activity, large-scale government-financed projects and widespread use of generators spur diesel demand in India. On the other hand, in China, construction and mining-linked activities have slowed, the expert pointed out.

Record diesel demand While current prices may be consumer-friendly, upside risks to crude prices persist. A flare up in geopolitical tensions is one. Also, the possibility of OPEC members adjusting supplies lower cannot be ruled out.

comment COMMENT NOW