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Drop in China’s oil demand pressures Opec to cut production

December 16, 2008

China’s once ravenous hunger for energy is weakening at a record rate, compounding the pressure on Opec to slash global oil production this week by as much as two million barrels a day to prevent a glut.

With China’s economy slowing sharply, the country’s electricity output during November fell 9.6 per cent from a year ago to just over 254 billion kilowatt-hours, according to official figures published on Monday.

It was the second consecutive monthly decline and the largest fall on record. Other data pointed to a 3.5 per cent fall in demand for crude oil during the month.

With the Opec cartel of 13 oil producing nations set to meet today and tomorrow in Oran, Algeria, mounting evidence of the accelerating downturn in China, the world’s second-largest oil consumer after the US, is likely to play a pivotal role in the discussions.

Abdullah al-Badri, the secretary-general of Opec, said: “We have to act, we see a very sizeable reduction. The market is oversupplied with oil.”

His comments were echoed on Monday by Chakib Khelil, the president of Opec. “Everybody is supporting a cut,” he said on his arrival at the meeting.

A sharp decline in consumption in the US and Japan, the world’s number one and three oil consumers respectively, has already driven oil prices down by about $100 since July.

Hopes held by oil exporters that continued growth in Asian demand might serve to bolster prices are rapidly fading, amid growing fears that China too is slipping into recession. Since 2003, China has contributed one third of the global growth in oil demand.

But Goldman Sachs, the investment bank, predicted on Friday that Chinese energy demand was “on the cusp of a sharp deceleration” as manufacturers cut production and lay off staff to cope with the downturn. It forecast that oil demand would fall by 200,000 barrels per day during 2009.

This month, Francisco Blanch, commodity strategist at Merrill Lynch, predicted that the price of oil could fall to $25 a barrel if China entered recession.

While coal still supplies about 70 per cent of China’s total energy needs, oil is the second-largest source, accounting for about 21 per cent.

China has made an effort to diversify its energy supplies but hydroelectric power (6 per cent), natural gas (3 per cent), and nuclear power (1 per cent) still account for small proportions of its total energy consumption.

Global crude prices rallied slightly yesterday as traders bet that Opec would announce a sharp cut in production and might be joined by Russia, which last week expressed its willingness to collaborate in bolstering prices.

Russia and Opec control about 50 per cent of the world’s crude oil supplies.

A two million barrel a day cut would be the largest in Opec’s history.

The cost of benchmark US crude rose by more than $3 a barrel in early trade to more than $50 — still far short of the $75 a barrel which Saudi Arabia, Opec’s biggest producer, said last month was a “fair price” for a barrel of oil.

There was growing evidence yesterday that Saudi Arabia had already acted to trim production ahead of the meeting. Mr Khelil, who is also Algeria’s Energy Minister, said that Saudi Arabia had taken a decision to reduce its supply to the market by 8 per cent.

— Shell has booked a fourth supertanker to store crude oil in the US Gulf. Ship brokers said that Shell had booked the Leo Glory from West Africa to the US.

TIMES ARTICLE

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