–Possibility of QE3, Persistent Supply Constraints Posing Upside Risks

By Brai Odion-Esene

WASHINGTON (MNI) – Downgrades to the outlook for Chinese economic
expansion have increased the downside risks for oil demand growth, but
growing expectations for the possibility of additional quantitative
easing by the Federal Reserve as well as persistent oil supply
constraints pose upside potential for oil prices, Deutsche Bank said
Friday.

In the bank’s weekly commodities report, Deutsche’s energy team
noted that persistent worries over Europe and growing concerns of a
greater-than-expected slowdown in China are raising demand-side worries.

“Ultimately, China’s growth prospects are a key factor for the
global oil balance given its dominant contribution,” the report said.
“We expect China will represent 35% of global oil demand growth this
year and 50% next year.”

The Deutsche Bank report said its China economics research team has
cut its growth projection for this year by to 7.7%, “largely on
weaker-than-expected policy stimulus,” while the growth forecast for
just the second half of 2012 was trimmed to 7.6% y/y from the previous
8.0%.

“Our economists also cut their 2013 outlook by 0.2ppts to 8.2% on
the likely slower-than- expected recovery of private sector activities,”
it said.

As a result, the bank is only forecasting China’s oil demand to
grow by 3% in 2012 and 4.5% in 2013, down from the five-year average
growth rate of about 7%.

On Thursday, a Boston Federal Reserve Bank research note said that
a study of China electricity demand through June suggested it would have
to double to match current China production figures.

On the other hand, the United States and the OECD as a whole will
be “negative contributors” to global oil demand, Deutsche Bank said.

The American Petroleum Institute reported last week that total U.S.
petroleum deliveries (a measure of oil demand) fell 2.7% in July to just
above 18 million barrels per day. This is the lowest July level since
1995 and the lowest level for any month since September 2008. Total
petroleum demand for the year to date was down 2.3%.

Meanwhile separate analysis by Platts published Wednesday showed
China’s apparent oil demand rose 2.4% on an annual basis in July to
average 9.2 million barrels per day. This was a rebound from the first
monthly contraction in more than three years seen in June, when demand
fell 1.9% year on year to 9 million b/d.

“However, refinery runs and crude imports in July indicate that
fundamental demand growth is less robust and two consecutive retail oil
product price cuts in June and July have pressured refining margins and
likely kept state refiners running at minimum levels,” Platts said.

Chinese businesses conditions worsened in August, according to the
results of the Flash MNI China Business Sentiment Indicator, which
showed key indexes slipping further into contraction.

The flash overall conditions index was at 46.76 in August from
49.73 in the final July result while the flash new orders index was at
46.57 from 52.32.

With regard to the impact that hopes of additional monetary
stimulus is having on oil market sentiment, the London-based Centre for
Global Energy Studies noted in its August monthly oil report that oil
prices have risen in recent weeks with the growing expectation that
“governments in Europe, the U.S. and even China will act to stimulate
their economies in the second half of the year, providing a boost for
oil demand in the months ahead.”

And the minutes from the July 31-August 1 meeting of the Federal
Open Market Committee, the Fed’s policymaking body, confirmed an easing
bias. “Many members judged that additional monetary accommodation would
likely be warranted fairly soon unless incoming information pointed to a
substantial and sustainable strengthening in the pace of the economic
recovery,” it said.

While this additional accommodation does not necessarily mean more
large scale asset purchases, the minutes said “many” participants
believed that this would provide additional support to the recovery.

As for supply constraints, the Deutsche Bank report noted that
physical oil markets continue to be plagued by realized disruptions and
fear of fresh disruptions as tensions in the Middle East appear to be
escalating, with Syria and Iran at the epicentre.

“While the impact of US/EU sanctions are expected to disrupt
roughly 1 million bbl/day in 2H, nearly half of total of Iranian oil
exports, we note that supply issues are widespread beyond the Middle
East in Europe (North Sea), Latin America (Colombia) and also Africa
(Libya, Sudan and Nigeria),” it said.

The report said crude oil production in the core eight
countries/regions identified above is down on average 630,000 barrels
per day in the first seven months of this year.

With Saudi Arabia’s spare capacity remaining below 2 million
barrels per day as of July, the lowest since Q4 2008 according to the
International Energy Agency, “The bullish backdrop for these supply
risks is that OPEC and more importantly Saudi spare capacity levels
remain constrained … leaving little cushion to cope with further
supply disruptions,” Deutsche Bank said.

** MNI Washington Bureau: 202-371-2121 **

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