Angelos Damaskos, investment adviser at Junior Oils Trust, takes a closer look at what has driven demand for oil and whether these trends are set to continue.
Oil demand patterns have changed significantly over the last decade. Historically, the first and the last quarters of the year saw higher demand due to the cold winter period in the developed countries. In 2012, world consumption of oil was higher by almost one million barrels per day in the second and third quarters.
Super-cycle oil dynamics
The reason for this is primarily due to China, India, Saudi Arabia and Brazil – the world’s fastest growing economies over the past decade – burning more oil during the warmer seasons, among other things to provide electricity for air-conditioning. It is becoming clear that the particular characteristics of the developing parts of the world now dominate energy usage.
At the turn of the century, some argued that the industrialisation and urbanisation of the BRICs (Brazil, Russia, India and China) would result in large growth in energy consumption that could potentially outstrip supply.
Supporters of this theory believed this super-cycle of demand would last for decades as the developing world caught up with the standard of life enjoyed in Europe and the US.
Until the global financial crisis in 2008, this theory held true with spectacular effect: the oil price rose six-fold, from $25/barrel in 2000 to nearly $150/bl in 2008.
Since then, volatility increased tremendously as the developed economies grappled with massive debt problems needing austerity measures and printing of money on an unprecedented scale.
Ignoring the peaks and troughs, nevertheless, the oil price has continued its uptrend to date, even though many forecasters argued the super-cycle was over and lack of demand resulting from a weakening economy would supress prices for energy.
The price of a barrel of Brent now trades around $112; four and a half times what it cost in 2000.
The rise in the price of oil has encouraged an investment boom in exploration and production. New reserves have been found offshore Brazil, East and West Africa and Asia, while new technologies have enhanced productivity.
The greater profitability as a result of high oil prices means that previously marginal deposits are now economic. Fracking and horizontal drilling in particular, new approaches to producing hydrocarbons from difficult geologies, have resulted in the US potentially becoming self-sufficient for its oil and gas needs in the next decade.
This progress has also meant that large producers became dependent on local markets. Canada, for example, focused on exploiting its tar sands by developing projects that extract large volumes of heavy fuel oil from the ground.
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