Time to look East

Published at 13:51 19 Nov 2012 by . Last edited 11:17 22 Aug 2019.

The ratcheting up in tensions in the Middle East is providing some support to oil prices, at a time when the market is focussed on the fiscal cliff and the possible ramifications for global and oil demand growth. Tangible disruptions to oil supplies from the Gaza situation should be extremely limited, if any, in our view. However, rising rhetoric can easily stoke up fears of wider issues in the region, and with the latest IAEA quarterly report on Iran reportedly showing further progress made on the Fordow enrichment site, geopolitics could easily to return to the driving seat in the near term.

Concerns about the fiscal cliff have also sidetracked improvements in Asian, and in particular Chinese, demand. The improvement in underlying Chinese demand since September has been noteworthy, with the average demand over the last two months totalling 9.770 mb/d, up y/y by 8.5%, compared to January-August y/y growth rate of 1.5%. The end to the destocking cycle in China signals an improvement in the macroeconomic backdrop, while the start-up of nearly 0.6 mb/d of new refining capacity should boost the bid on crude even further.

Any recovery in Chinese demand is likely to be slow and we do not expect oil demand growth to pick up to double-digit rates last seen in 2010, but we do expect additional spending measures to be announced early next year, as the new Chinese leadership takes office. As with previous rounds, the stimulus will probably be focussed on infrastructure, the industrial sector and social development, but the government will be keen to avoid adding to the bad loans that have emerged from the last round of stimulus-driven lending, particularly in the property sector. Thus, the ability of China to surprise to the upside next year should not be underestimated.

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