China (Platts) -- August 11 - 15, 2008

By reporters at Platts, the energy information division of the McGraw-Hill Companies. For more information about Platts' information products in China, contact Platts at china@platts.com, or call its representative office in Guangzhou at (+86) 20 2881 6588.

Energy futures fell by 1-2% across the board last week and look likely to face another rough week at the office in the coming five days, as new evidence that the US consumer is in deep trouble continued to suck oil futures -- in particular -- into a deep whirlpool.

US oil demand fell faster in the first half of this year than at any time since 1982. And while there was something for market bulls to cheer about in mid-week US oil stocks last week, it was impossible to fully escape the crush on prices that followed that piece of news.

Global oil demand rose by just 500,000 barrels per day to 85.56 million barrels per day in the first half of 2008 compared to the first half of 2007, with an 800,000 barrels per day year-on-year downturn in the US offset by growth in non-OECD countries, the US Energy Information Administration said in its August Short-Term Energy Outlook August 12.

"The decline in US consumption in the first half of 2008, reflecting slower economic growth and the impact of high prices, was the largest half-year consumption decline in volume terms in the last 26 years, when, in the first half of 1982, consumption dropped by nearly 800,000 barrels per day," the EIA said.

Front-month crude oil futures on the New York Mercantile Exchange and ICE Futures in London ended the week down at $113.77 per barrel and #112.55 per barrel respectively.

Analysts were calling for more losses to come.

"The recent fall has reshaped the forward curve from backwardation into contango," said Australia's Commodity Broking Services in a research note after markets closed Friday.

"Compare to last year where crude oil prices fell also this summer, inventories should build. In consequence, after possible range bound trading, we expect oil to trade lower by year end and beginning of next year. Though prices often overshoot in the short run, they cannot defy physical realities in the longer term."

Only a physical disruption could push oil prices back into overdrive, said the company, which said it believed oil prices had peaked for at least a year or two. "In our view, the recent correction in oil prices was overdue and softness awaits in the next 12 months."

That view was certainly consistent with the point of view coming from OPEC, the cartel of oil exporting nations that has found itself in the firing line through most of this year's bull run. Oil prices are beginning to reflect softer fundamentals, OPEC said on August 15 in its monthly oil market report.

Indeed, it said, "risks to the outlook for the world oil market appear to be on the downside." The group's Vienna secretariat said that with OPEC currently producing significantly in excess of expected demand, there was potential for a "sharp build" in global crude stocks.

OPEC revised its forecasts of demand for its own crude upward by 100,000 barrels per day to 32.05 million barrels per day this year and by 90,000 barrels per day to 31.33 million barrels per day next year.

But current OPEC production, which the secretariat, using secondary sources, estimated at 32.643 million barrels per day in July, is well above these projections.

"With current production, OPEC is now producing well above the demand for its crude," the report said. "The healthy supply situation has been reflected in the shape of the forward market, which has shifted into contango since late May, indicating prompt supply is more than sufficient to meet demand."

The report said the outlook for the world economy had deteriorated further over the past few weeks as more evidence of a global slowdown emerged. It said a good indicator of the decline in oil demand growth had been the drop in US gasoline consumption this year.

But while conventional wisdom is now pointing to a slow end to the year for oil, a surprise drawdown in US oil inventories last week showed that the markets might be adjusting to a weaker US market more quickly than expected.

Crude and product futures prices rallied August 13, after weekly data showed lower gross refinery inputs in nearly every region in the US that, when combined with low imports, left product inventories below the five-year average for the first time in six months.

Product stocks tumbled 5 million barrels to 686.3 million barrels in the first week of August, EIA said. Total US product stocks at 686.3 million barrels the week ending August 8 were 4.54 million barrels below the five-year average and 8 million barrels below year-ago levels, the EIA data showed.

Gasoline stocks fell 6.4 million barrels to 202.822 million barrels; distillate inventories dropped 1.7 million barrels to 131.587 million barrels, while jet stocks dipped 600,000 barrels to 40.786 million barrels.

On a four-week moving average, gasoline demand was 1.9% below last year's exceptionally high reading of 9.617 million barrels per day. But given that retail prices are over $1 per gallon above year-ago levels, demand readings are fairly impressive.

With demand at this level and output fairly low for August, only imports could prevent stocks from tumbling at an unusually rapid pace, but imports remained low. A 74-cent drop in RBOB futures over the last three weeks has failed to attract cargoes from Europe, causing imports onto the East Coast to fall another 79,000 barrels per day to 785,000 barrels per day.

Updated: August 18, 2008