Asia and Oil Demand
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For the first time since the 2008-09 financial crisis, global oil demand is down. According to the International Energy Agency, oil demand fell by 300,000 barrels a day year on year in the fourth quarter of 2011.
The IEA said the drop was due to a combination of factors including a weakening global economy, a mild winter in the northern hemisphere and high oil prices.
The agency also lowered its forecast for growth in oil demand this year from 1.3 million barrels a day to 1.1 million barrels a day. Global demand for oil in 2011 was 89.5 million barrels per day.
But there is one bright spot for oil demand – Asia.
The emerging economies of China, India, Indonesia and others have become key in helping keep crude oil prices up around the $100 a barrel mark.
The oil market is diverging as never before. On the one hand demand for oil is dropping in the weak developed economies while on the other hand, demand continues surging in the developing economies of Asia.
The stark contrast was evident in the fourth quarter 2011 statistics for oil demand. Asian oil demand grew by 400,000 barrels a day while consumption elsewhere in the world fell by 700,000 barrels a day.
Overall for 2011, Asian demand grew by 720,000 barrels a day. In contrast, demand from North America fell 310,000 barrels a day and European demand fell 260,000 barrels a day according to the IEA.
In Asia, it is China that is the linchpin for oil demand growth.
Demand for oil from China in 2012, however, is expected to show just a mild rise and a slowdown from the rapid rise in demand shown over the past decade.
China consumed a modest 1.7% more oil in November than in November 2010. In fact, throughout 2011 there was a slowing growth rate for energy demand.
On the face of it, this sounds good news for oil bears, such as those who hold the United States Short Oil Fund (LSE: DNO).
But there is another factor at play here. The Chinese government is worried about how any cutoff in oil supplies will hurt its economy. So, like its American and European counterparts, China is interested in building a strategic oil reserve.
It has a lot of work to do too.....
China began its program in 2006 and completed the first phase, 102 million barrel buildup two years later. Phase two consisted of a further 168 million barrels of oil added to its reserve at the end of 2011.
The country is expected to complete its stockpiles program by 2020 when it will have at least a 500 million barrel reserve. Some Chinese officials are talking about having a billion barrel reserve.
China is not alone in pursuing a strategic petroleum reserve among Asian nations. The other Asian economic giant, India, has also begun a petroleum reserves program. They are well behind the Chinese in stockpiling oil, holding only 10 million barrels.
The need to buildup a strategic petroleum by these rapidly growing Asian economies should keep a floor under oil prices, buoying holders of ETFs on crude oil such as the United States Oil Fund (NYSEMKT: USO) and the United States Brent Oil Fund (NYSEMKT: BNO).
As Janet Kong of CICC Bank in China noted, any weakness in oil prices in the coming months will offer the country a good buying opportunity to fill its strategic oil reserves.
Which will no doubt please oil market bulls.
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