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Saudi Arabia Likely to Keep Oil Prices to Asia Unchanged

Oil Markets Wrongfooted By Change In Speculative Buying

Last week, oil prices logged a third straight weekly decline, sinking to the lowest level since mid-July as concerns about demand continue to replace the fear of production outages related to the Middle East conflict. Front-month Nymex crude for December delivery rose 1.9% Friday but settled -4.1% for the week to $77.17/bbl, while January Brent crude recorded a similar weekly decline to $81.43/bbl. December gasoline was down -0.5% for the week to $2.19/gal while December diesel fell -6.2% to $2.74/gal.

Oil markets have been experiencing a shift in sentiment, with a significant decline in speculative buying also putting pressure on prices. The volume of long positions in crude oil has decreased due to macroeconomic fears overshadowing traditional supply and demand factors. To exacerbate the situation, global supply has increased largely driven by higher output by Iraq and Iran. Indeed, some indicators suggest that softness has developed in the physical market raising worries about faltering demand. Notably, Chinese refiners have ordered less supply for December. Although China imported 13.5% more crude in October than a year ago, the growth figure was exaggerated by coronavirus restrictions in place last year. Imports were up slightly on a month-on-month basis to 11.5M bbl/day but remained ~1M bbl/day below levels during the summer. Related: U.S. Oil Rigs Continue To Fall

The current situation is in stark contrast to the mood in recent weeks whereby traders anticipated a major threat to global oil supply, reminiscent of the Arab oil embargo that occurred half a century ago during the Yom Kippur war. Overall, the current fall in oil prices could signify growing concerns about the state of the global economy as well as a market being driven by fear rather than fundamentals.

"The meltdown we've seen in prices is reflecting two things: concerns about the global economy hitting a brick wall based on data out of China and also a sense of confidence that the war in Israel and the Gaza Strip is not going to impact supply," Price Futures Group's Phil Flynn has told Reuters.

India, Not China, To Drive Future Oil Demand

In the not-so-distant future, India, not China, is expected to be the main driver of global oil demand growth.

For decades, China has been the key to global oil demand growth thanks to an economy that maintained a blistering growth clip for a long stretch. But as the law of large numbers dictates, that era of exemplary growth could be in the rearview mirror. Economic pundits have predicted that China's growth rate will slow down to between 2 and 5 percent in the coming years, down from nearly 10% in the past decades thanks to a declining population and slowing productivity. The dramatic slowdown is expected to change the global oil order, with India replacing China as the main driver of global demand growth. Over the past decade, the Asia-Pacific region accounted for 79% of global oil demand growth with China alone accounting for nearly 60%.

"China's role as a global oil demand growth engine is fading fast," Emma Richards, senior analyst at London-based Fitch Solutions Ltd, has told The Times of India. According to the analyst, over the next decade, China's share of emerging market oil demand growth will decline from nearly 50% to just 15% while India's share will double to 24%.

Over the medium-term, commodity analysts at Standard Chartered have predicted that China's oil product demand growth will slow to 516 kb/d in 2024 from 819 kb/d in 2023, the result of a fall in GDP growth to 4.8% in 2024 (from 5.4% to 2023). They have also forecast India's demand growth will increase to 331 kb/d in 2024 from 268 kb/d in 2023, helped by favorable base effects and only a slight slowing in GDP growth (6.0% in 2024 from 6.1% in 2023).

A rapidly growing population, which has likely surpassed China's, is expected to be the main driver of consumption trends in India. Meanwhile, the country's transition from traditional gasoline and diesel-fueled transport is expected to lag other regions, in sharp contrast to China's skyrocketing adoption of electric vehicles and clean energy in general.

China's adoption of electric vehicles has been lightening fast, a trend that does not bode well for gasoline demand in the world's biggest car market. EV sales in China nearly doubled to 6.1 million units in 2022, compared with just 48,000 units sold in India, according to BloombergNEF. BNEF has revealed that EVs are already displacing over 1.4 million barrels a day of oil use globally.

By Alex Kimani for Oilprice.com

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Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com.  More