OPEC raises its forecast for crude demand, positive for oil producer stocks
OPEC, or the Organization of the Petroleum Exporting Countries, is an intergovernmental organization that represents 12 oil exporting countries (Iraq, Iran, Kuwait, Saudi Arabia, Venezuela, Libya, United Arab Emirates, Qatar, Algeria, Nigeria, Ecuador, and Angola) which produces ~60% of the crude oil traded internationally. Therefore, the organization can have a strong influence on the market; OPEC nations convene regularly to coordinate petroleum policy (generally by directing price and production). The organization regularly releases a monthly report, which some market participants review to gain a sense of the trends and sentiments surrounding oil.
In the latest OPEC monthly report, the organization stated that it revised its forecast for world oil demand growth in 2013 up by 80,000 barrels per day; because of this growth is expected to be 800,000 barrels per day this year. OPEC noted that it expects 400,000 barrels per day of growth from China, 700,000 barrels per day of growth from other non-OECD countries, and 300,000 barrels per day less demand from OECD countries. Brent oil prices on the day moved up from $118.13/barrel to $118.66/barrel. The prior forecasts and current forecasts are displayed in the chart above.
The organization stated that demand in China has been growing for the past four months, with a ~6% increase month-over-month in December. OPEC also cited colder-than-normal weather thus far in North Asia, improving economic data from European countries, India, and Brazil as factors in its higher oil demand forecast. OPEC also stated that world oil demand in 4Q12 grew 1.2 million barrels per day, compared with average growth of 0.7 million barrels per day during the first three quarters, bringing 4Q12 demand to 90.3 million barrels per day which was the highest on record.
All else equal, higher demand translates into a higher price environment which is a positive for oil producers such as Exxon Mobil (XOM), Chevron Corp. (CVX), ConocoPhillips (COP), and Hess Corp. (HES). This is also positive for energy-focused ETFs such as the Energy Select Sector SPDR (XLE). Higher prices result in higher profits and therefore higher stock price valuations. The below graph shows the price of oil plotted against XOM and XLE on a percentage change basis since the beginning of 2007, and one can see that the three have largely moved in tandem over the past several years.
Market participants look at OPEC’s monthly report because the organization has a great deal of information regarding and control over the dynamics of the oil market. This expected increase in demand forecasted by OPEC is a positive for oil prices and therefore also a positive for oil stocks such as XOM, CVX, HES, and COP. Those holding such names may find it helpful to monitor OPEC’s outlook and the commentary that the organization provides.
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