Increased subsidy burden at high oil prices will lead to de-regulation with a downside risk to oil demand in high growth markets in Asia
At APPEC 2012 today, Wood Mackenzie drew two trends in the oils market from now to 2013. Firstly, barring a supply disruption, for 2012, oil prices have likely seen the peak for the year. However, we expect prices to remain above US$100 per barrel (bbl) till 2013 albeit they may fluctuate if influenced by new price drivers. Secondly, new complex refineries increase the demand for heavy crudes and tight oil play in the US will increase the supply of light sweet crudes, leading to a narrower light-heavy crude differentials. High subsidy burden on various governments in Asia at our projected oil price will increase the pressure to de-regulate, so putting a downward risk to oil demand growth in key markets over time.
Head of Downstream Research, Mr. Alan Gelder, presented on the trend in oil prices saying, “Although we won’t see demand growth like that of 2009-2010, global oil demand growth will help keep prices above US$100/bbl in the near term. This is even if healthy Non-OPEC production and OPEC spare capacity growth signal prices on the downward trend.”
Robust demand growth is still expected by 2013, increasing by 1.0-1.5 million barrels per day (mb/d), driven by Asian oil demand for transportation, petrochemical and power sectors by countries such as Indonesia, China, Japan and India. These four markets account for a major share of Asian demand growth.
There are risks to this forecast however. Mr. Gelder explains, “Price influencers have moved beyond fundamental market forces and are now driven by global economic uncertainty, geopolitical issues and changes to supply outlooks. Economic events such as a Eurozone recession could decrease the demand for crude oil thereby weakening prices. Geopolitical factors can affect major supply countries such as Iran, Syria Sudan and Iraq, which has an impact greater than the projected growth in US tight oil production.”
Having presented separately on the near-term oil product market trends, Mr Sushant Gupta, Senior Asian Downstream Analyst, says, ”High oil prices will increase the subsidy burden on many governments in Asia which will increase the pace of de-regulation.” Wood Mackenzie estimates that in 2011, refining and marketing companies in India, China, Malaysia, Indonesia, Taiwan and Vietnam made a combined loss in the range of $70 billion (bn) to $80bn due to government intervention in controlling the consumer prices.
As such, there is considerable pressure on governments to deregulate the markets in whatever capacity they can and let the market forces determine the consumer prices. This puts a downward risk to oil demand growth in key markets such as China, India, Indonesia and Malaysia or a shift towards alternate fuels. Income levels, consumer behaviour and inter-fuel competition will ultimately drive the impact of deregulation on oil demand. For example in India, subsidies distort the demand for diesel/gasoil, with diesel cars showing a strong growth in sales and diesel/gasoil even replacing fuel oil to generate power.
In summary, Mr. Gupta says, “Oil prices will remain high enough to make the subsidies unsustainable for many economies and will lead to eventual de-regulation.”