Crude prices will fall as US demand slides - S&P

04 July 2008 11:40  [Source: ICIS news]

SINGAPORE (ICIS news)--Crude oil prices will come down in the short term on the back of deteriorating demand from the world’s largest consumer, the US, as well as the recent reductions to fuel subsidies in developing countries, said ratings company Standard & Poor’s (S&P) on Friday.

 

Despite the popular belief oil prices were higher than supply and demand justified, crude levels continued to rise, said S&P.

 

“What continues to drive global demand and prices is the economic growth of Asia. In the US, the number of miles driven has dropped 2.1% for the first four months of the year. Total light vehicle sales fell to 14.3m units in May and most importantly, cars outsold trucks,” said David Wyss, S&P’s chief economist.

 

"The good news is that energy is a smaller part of the US and world economies than it once was," said Wyss.

 

"Even this year, we expect the average US household to spend 6.7% of its income on energy, which is about the same as in 1971, before OPEC. In 1980 and 1981, energy was 7.9% of income. This reflects a greater efficiency in energy use relative to GDP”, he added.

 

The S&P report - entitled As Demand Continues to Increase, How Will the World Cope With Sustained High Oil Prices? - also said speculation was raising oil futures prices but added it was not likely to have much impact on spot prices.

 

Money was flowing into commodity funds because commodity prices had been strong and the negative correlation with the stock market helped the overall performance of the portfolio, S&P said.  

 

However, as investments were ramping up, it could have some residual impact even on spot prices, given the oligopolistic nature of the oil industry, the report said.

 

The comments came as oil hit new historical highs this week of above $146/bbl and edged closer to investment banking major Goldman Sachs’ price prediction of $150/bbl, while petrochemical players continue to feel the pain of ever-rising feedstock costs.

 

The US Energy Information Agency (EIA) recently estimated world energy demand to increase by 50% by 2030, assuming that oil would be a diminishing share of world energy production, falling to 33% by that time, from its current 37%.

 

Coal, a relatively plentiful resource, is expected to be the biggest offset to this decline in crude-based energy source with its share rising to 29%, from 27%, despite the increasingly popular topic of global warming and sustainable development.

 

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By: Bohan Loh
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