China set to be the largest driver of oil prices in a decade

The correlation between China's industrial growth and the WTI oil price has increased from 0.45 in May 2001-2006 to 0.65 in May 2006-2011.

Though China is the second largest consumer of oil, its per capita oil consumption is only about a tenth of the US, says OCBC.

Here’s more from OCBC:

Assuming the country's urbanization strategy remains on track, we estimate that China may become the largest driver of oil prices over the next five to ten years. Indeed, we find that the correlation between China's industrial growth and the WTI oil price has increased from 0.45 in May 2001-2006 to 0.65 in May 2006-2011, and we would increasingly look to the country's forecasted economic growth for signals in the oil price.

Oil price volatility theme to resurface in the future. However, the influence of speculators in the oil market has increased over the years. World production of oil has not kept up with demand growth, and the impact of speculation can be greater felt in a tight demand-supply situation.

Coupled with the increased sensitivity of oil prices to supply disruptions, unless we see an easing in the demand-supply situation, we believe that volatility in
oil prices may be increasingly prevalent in the future.

How will this affect capital expenditure? Undeniably, the volatility of oil prices negatively impacts investments in the oil and gas sector. However, supposing the developed countries continue their fragile economic recoveries
and China's growth remains on track, we believe that oil prices should remain above US$75/bbl which should sustain most capital expenditure in the sector.

In particular, in the upstream offshore segment, we expect the rig order momentum to remain strong; the increasing number of permit approvals in the US Gulf of Mexico should spur interest in semi-submersibles, probably by early next year. Demand for large productionplatforms is also holding up, and Sembcorp Marine's subsidiary, SMOE, has been bidding for work as well.

Photo credit: Atle Brunvoll

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