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China factor driving oil prices

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Organization of Petroleum Exporting Countries (OPEC)
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(CNN) -- Surging Chinese demand is underpinning the recent spike in the price of oil, figures from the International Energy Agency (IEA) show.

This "China factor" has more bearing on oil prices than the "risk factor" coming from global tensions, some experts say.

While speculative buying on heightened tension in the Middle East is seen as the reason oil futures touched a 21-year high of $41.85 a barrel in New York earlier this month, oil experts insist the price rises are driven primarily by demand growth -- about half of which is coming from China.

An energy exporter until just a few years ago, China is now the world's fastest growing major importer of oil.

In the first three months of 2004, when China's economy grew at a breakneck pace of 9.7 percent, demand for oil in China grew almost 1 million barrels a day.

Naomi Fink, a senior analyst with BNP Paribas in Tokyo, told CNN Monday that "so far, we are seeing demand-driven price increases".

With the Chinese government determined to slow the pace of economic growth, analysts say oil prices could drop sharply next year in response to cooling demand.

Andy Xie, Hong Kong-based chief Asia economist for Morgan Stanley, believes the oil price spike is a result of China's investment overshooting, leading to a shortage of electricity that has seen diesel being substituted for coal to generate power.

In a commentary released Sunday, Xie said he expected China's electricity shortage would peak in the northern summer and fixed investment would decelerate sharply in the second half of this year.

This would see the oil price reverting to a mean of about $25 a barrel towards the end of this year, and falling below the mean in 2005, Xie said.

Demand fluctuations

Saudi Oil Minister Ali al-Naimi is proposing an increase of 2 million barrels per day.
(millions of barrels per day)
Demand, May 2004: 80.6
Supply, May 2004: 81.5
Growth over 2003: 2.0
Source: International Energy Agency, May 2004

In Xie's view, world oil prices could become captive to Chinese demand fluctuations, in the same way that metal prices are now driven by China's investment cycle.

Based on long-term trends, Xie says China's oil consumption could double from 7 million barrels a day now to 14 million a day by 2014. But he says China cannot afford this, and so must become more energy-efficient or find substitutes for oil.

Despite this China factor, the international political focus remains on the actions of OPEC and key producers such as Saudi Arabia, which on Friday proposed that OPEC pump an extra two million barrels of oil a day.

That would lift the 11-member cartel's official production ceiling to 25.5 million barrels a day. Output by the OPEC-10 (which excludes Iraq) has been running slightly above this figure for the past six months.

But the Saudi plan did not win enough support at a weekend meeting in Amsterdam attended by OPEC oil ministers, and will now be discussed when OPEC members meet in Beirut on June 3.

On Sunday, the world's richest economies -- the Group of Seven -- called on oil producers to pump enough oil to support the world's rapid economic growth pace. (G7 calls for more)

But latest IEA figures show production is more than meeting demand.

According to the IEA's May oil market report, global demand this year is running at 80.6 million barrels a day.

World oil production fell by 440,000 barrels a day in April to 81.5 million barrels, with the supply by OPEC members falling by 415,000 barrels a day.

Non-OPEC oil comes primarily from the former USSR (mainly Russia and Kazakhstan), with more than 11 million barrels a day, followed by Latin America on 4.08 mbpd, Africa 3.46 mbpd and China 3.40 million bpd.

The G7, made up of the United States, Japan, the United Kingdom, France, Germany, Italy and Canada, said Sunday the global economy is enjoying its fastest expansion in 15 years, with growth rates of around 4.25 percent.

To maintain that pace, the G7 supports oil supply increases along the lines of the proposal by Saudi Arabia.

Gas prices in the United States have climbed sharply over the past two weeks, rising more than 14 cents to an average of $2.07 per gallon, according to a nationwide survey released Sunday. (U.S. gas prices rise)

On Monday U.S. oil prices fell almost one percent. U.S. light crude (CLc1) sank to an intraday low of $39.48 a barrel, extending Friday's 87-cent fall to below the $40-a-barrel threshold after Saudi oil minister Ali al-Naimi announced the proposal.

According to Venezuela's Energy Minister Rafael Ramirez, oil prices will fall when Middle East tensions ease and speculators step back.

He said at the weekend there was a premium of $8 a barrel in oil prices because of fears of sabotage attacks on key oil infrastructure in the Middle East, which holds two-thirds of global reserves.

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