Shell, BP say high oil price erodes demand

Thu Jul 28, 2011 1:11pm EDT

* Shell says OPEC capacity worry to fuel oil price

* BP, Shell see lower products sales

* Refining use rates to stay low throughout 2011

By Dmitry Zhdannikov

LONDON, July 28 (Reuters) - High crude prices have dented global oil demand in the second quarter, oil majors said this week, in a trend likely to be repeated in the second half of the year if prices stay high.

Oil majors BP , Royal Dutch Shell (RDSa.L) and ConocoPhillips all said they witnessed signs of demand rationing in the second quarter, which saw Brent oil prices LCOc1 spiking to $127 per barrel, close to their all-time high of $147.

Many analysts and fund managers say demand erosion will ultimately help bring oil prices down if producing nations cannot pump more to help support fragile world economic growth.

But Royal Dutch Shell's (RDSa.L) chief executive told Reuters concerns over geopolitical tension in the Middle East and falling output capacity will be supporting prices for the foreseeable future.

"It (oil prices) is reflecting obviously today expectations that demand will still go up and supply will be in a catch up mode," Peter Voser told Reuters Insider Television.

"It also reflects that OPEC spare capacity is now below 2 million barrels (per day), according to the latest numbers, and there are some geopolitical tensions in it," he said.

Shell said oil products sales volumes decreased by 8 percent compared with the same period a year ago while, excluding the impact of divestment, sales volumes were 4 percent lower than in the second quarter of 2010.

On Tuesday, BP's head of refining and fuel marketing Iain Conn said the firm's marketing volumes were down about 2 percent in the second quarter year-on-year.

"This is a reaction to high prices. This is something we are going to continue to see in Europe and the U.S.. East of the Rockies retail volumes are down about 6 percent year on year... Everywhere else were are seeing diminishment of demand," he said.

IDLE REFINERS

European oil consumption is set to fall to its lowest since 1995 this year as high prices cut sharply into fuel use in debt-laden peripheral eurozone nations.

Efficiency gains have reduced European oil demand over the past five years. Crude price changes do not normally have as much impact on retail demand as in the United States because tax in Europe makes up a much larger share of total fuel costs.

Some funds, including Investec, say the risks of demand destruction in the United States are underestimated as gasoline prices hover around a critical level of a tenth of personal disposable income, after which demand destruction begins.

U.S. No.3 oil firm ConocoPhillips said on Wednesday its U.S. refining crude oil capacity utilization rate was 90 percent and the international rate was 96 percent.

"We expect global refining capacity utilizations to be in the low 90s in the second half of 2011," said Conoco's chief financial officer Jeff Sheets.

Latest European data from Euroilstocks showed total refinery production in 16 European countries was down 8 percent in June, year-on-year, and refining utilisation capacity hovered at around 80 percent compared with 87 percent last year

In China, which has been the engine of global oil demand growth in the past year, implied oil demand rose 1.1 percent in June from a year earlier, the slowest growth in more than two years as Beijing's monetary tightening cut into oil use.

Developed consuming nations released emergency stocks last month in a bid to cap oil prices and protect economic growth although prices quickly returned to where they were prior to the released.

Voser said he did not support the release as the world needed sustained new supply from places such as Iraq or the Arctic.

"I don't believe in these measures. These are very short-term measures and do not bring any medium and long-term benefits." (Reporting by Dmitry Zhdannikov, additional reporting by Tom Bergin, editing by Richard Mably)

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