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No sign of an oil-demand recovery

Oil futures rose to almost $70/b towards the end of July, as a result of renewed hope that the world economy is on the mend

It was quite a rise – largely attributed to buoyancy in equity markets and continuing weakness in the dollar: two weeks before, futures had been trading below $60/b. Yet there is precious little evidence to suggest that oil demand is entering a recovery phase.

US oil inventories are at their highest level in almost two decades because demand remains weak: the Centre for Global Energy Studies says world demand was down by 0.7m b/d in the second quarter compared with the first. Opec says demand for its crude will not reach pre-financial-crash levels until 2013.

The IEA also expressed bearish views about the outlook for oil prices, pushing back expectations for a return to trend demand growth. Its Medium-Term Oil Market Report 2009 forecasts annual demand growth of between 0.4% and 1.4% after 2009, depending on the pace of global economic recovery. That range is "hugely significant" for global oil balances and would result in total oil demand in 2014 of 85m-89m b/d. In addition, there are "some hints" that a "definitive structural downshift" in oil use will occur, says the IEA.

Meanwhile, China's impressive second-quarter GDP growth rate of 7.9% – placing its 8% year-end target in reach – also provided support for prices. But some economists say it is not necessarily a precursor to a wider economic recovery. With China's main markets still suffering, state spending on infrastructure projects may not be sufficient to catalyse the sustained recovery that could lead the rest of the world out of recession. Also, government data show Chinese oil imports declined in June.

Opec's resolve in enforcing lower output targets is fragile – another bearish factor. And although compliance with quota cuts of 4.2m b/d has been high by historical standards, it will worry that another cut – to be discussed when it meets again next month – could destroy yet more demand if it pushes prices higher.

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