Oil market equilibrium fragile, says think tank

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LONDON, July 21 (UPI) -- The current equilibrium in the global oil market remains fragile, with continuing stability still dependent on imponderables in the geopolitical arena, the London Center for Global Energy Studies said in its monthly oil report for July.

CGES Chief Economist Leo Drollas told United Press International in an interview more caution was called for while interpreting China's intake of oil as increased Chinese consumption and while depending on a European economic recovery to trigger change in the market.

Chinese demand and progress in European growth, alongside a U.S. rebound, are seen by most economists as major catalysts for a global recovery.

"European demand is dead and flat and will remain so for some time," Drollas said. At current growth forecasts for Europe of roughly around 1 percent oil demand in the region was likely to remain feeble. The fact that Europe was exploring alternatives to oil and switching to other fuels would also impact on future demand for oil in Europe, he said.

A slow recovery in the United States offered the market more promise than what Europe could offer at the moment, said Drollas.

On China, Drollas cautioned against misinterpreting Chinese oil imports. "At this moment, it is not clear how much of the oil bought by China is going into stocks and filling up new facilities," including new pipeline networks and refining capacity. "China buying more oil is not the same as China consuming more oil."

He explained that much of Chinese oil intake could be going into filling new pipelines and refineries and not being burned in a consumer spree.

Crude oil prices rose to more than $78 per barrel in New York Tuesday in anticipation of a weekly U.S. inventory report.

Drollas said a dramatic change in the current price range was unlikely in the near future, barring the imponderables cited in the CGES July oil report as unforeseeable events in the Iran nuclear controversy, or endemic conflict in Sudan or West Africa's Niger Delta.

"With the oil market receiving no clear signals from the fundamentals of supply and demand, oil prices are reacting to sentiment about the pace and robustness of

the global economic recovery, which is buffeted by each new piece of data and every new forecast," CGES said in its July report.

"Ample spare capacity throughout the oil supply chain is effectively keeping a lid on price rises," CGES said. However, continuing heavy oil use in the transportation sector was keeping the prices up.

The think tank, inspired behind-the-scenes by founder Sheik Zaki Yamani, Saudi Arabia's former petroleum minister, said markets' belief that OPEC will act to prevent prices from falling much less than below $70 a barrel was also helping to maintain the current equilibrium.

Global oil demand at the end of the second quarter of 2010 was still less than the level of two years earlier. Taken together with ample spare capacity both for production and refining, that recovery in demand was unlikely to induce a further price increase.

CGES also cited changes in global consumption patterns. "People have become more conscious of the cost of fuel and appear to be adopting more conservative approaches to its consumption," it said.

"The world is increasingly burning fuels other than oil to generate heat and power, leaving transportation as the only area where there is still no large-scale alternative to oil," CGES said.

"Even here, though, alternative plant-based fuels are beginning to make inroads into one of oil's last strongholds," the Center said, pointing out that global production of biofuels stands at around 1.8 million barrels a day, accounting for 2 percent of global fuel liquids supply.

"With no widely available alternative, consumers in the transport sector are willing to pay far higher fuel prices than their counterparts in the static sectors, helping to maintain the price of oil," CGES said.

However, the think tank warned, "There are still many factors that could upset the apparent balance. Geopolitics is never far from the oil industry. Whether it is the fragile peace still holding in the Niger Delta, the continued standoff over Iran's nuclear ambitions, or the potential for renewed fighting in Sudan, escalating tensions can quickly turn comfort into a perceived shortage.

"In the meantime, there seems little fundamental reason for oil prices to break out of their current trading range," CGES said.