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Page added on September 23, 2014

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The shifting fundamentals of commodity demand

Consumption

Economic growth in emerging markets has driven energy commodity demand over the last decade, but that growth is now slowing. According to the IMF, GDP growth in emerging markets fell from 7% a year on average in 2003-2008 to 6% in 2010-13. The Fund forecasts that emerging market growth will dip further to 5% from 2014-2018. The medium-term outlook is no better. The IMF writes: “In the past, we expected growth to bounce back (and it did). This time seems different.”

One of the expected spillover effects is lower commodity prices. Despite ongoing conflicts in the Middle East and North Africa, the supply/demand balance in the oil market continues to look increasingly bearish. Demand forecasts for this year and next have been revised down, while non-OPEC supply, principally in the form of US output, continues to surge.

The expected surplus of production over consumption this year is running at close to 800,000 b/d, up from estimates of 500,000-710,000 b/d in August. For 2015, the supply surplus was estimated at between minus 60,000 b/d to plus 300,000 b/d in August; this has moved up to plus 100,000 b/d to 400,000 b/d in September.

Prices are already responding to this shift in fundamentals. Physical crude marker Dated Brent dropped to $96.29/barrel September 12, more than $11/b below its 12-month average, registering its lowest level since June 2012. (Note: on September 22, it was assessed just over $95.30).  

Given the diverse sources from which oil can be pumped, there is no single marginal price for new oil production. Moreover, given the generally long lifespan of oil projects, producers base investment decisions on the long-term outlook for prices rather than the current price. But between $80-$100/b, with declining expectations about the long-term outlook, the most expensive projects will start to look increasingly marginal. Barclays Capital predicted mid-year that 2014 would see a another record spend on upstream E&P.  But 2015 might prove quite different.

platts



4 Comments on "The shifting fundamentals of commodity demand"

  1. Davy on Tue, 23rd Sep 2014 6:54 am 

    As the expat dog likes to say:

    “The beat goes on”

  2. Makati1 on Tue, 23rd Sep 2014 10:26 am 

    Actually, the West would love to have any real growth above zero. Five percent would be a bonanza for the US, the EU, or Japan, but it will never happen in real life.

  3. MSN Fanboy on Tue, 23rd Sep 2014 12:38 pm 

    Why not Makati?

  4. Makati1 on Tue, 23rd Sep 2014 8:53 pm 

    MSN, because they are all maxed out financially and energy wise. They are bouncing off the place where higher energy prices collapse their economies and lower prices collapse their financial systems. (Intertwined but different)

    Capitalism requires an ever increasing amount of debt and a fair chance that all that debt will be repaid with interest. That is what powers the whole system. Add in the fact that they are ALL socialist style governments now and you can see the problem. Damaging the social safety net ALL of them have, will bring down the wrath of their citizens. Even the USSA has a soup line of some 47 million citizens. Stop the “soup” and you get revolt. (Welfare, unemployment insurance, Medicaid, Medicare, Social Security, Veterans benefits, etc.)

    I could go on and on but, maybe you get the picture. All of those countries are run by puppets of the elite banksters, not their citizens.

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