* China's diesel demand for power a key market driver
* Doubt voiced Iraq will meet oil targets, Libya ramp up
By Claire Milhench
LONDON, Oct 25 China's thirst for oil will
squeeze prices higher and destroy demand in developed economies
if world oil supply growth does not exceed current trends, said
senior commodity fund managers who did not expect fast oil
output rises in Libya and Iraq.
"In the last 12 months China's demand for diesel for power
generation has been one of the major drivers (of the market),"
Tony Hall, chief investment officer of the Duet Commodities
Fund, said at a conference in London on Tuesday.
"They do tend to step in and stockpile," he said.
Hall did not see any prospect of the much-debated economic
"hard landing" in China and said supply would not be able to
keep pace with the fast-expanding economy's need for oil.
"We are not seeing any significant squeezes yet but this is
a supply side story - if we carry on with this current trend we
will have some problems in the light, sweet products," he said.
He highlighted a projection of global oil demand growth of
1.4 million barrels per day for next year. "I don't believe
supply can keep pace."
Hall's comments were supported by Todd Gross, chief
investment officer of Hudson Capital Group, which runs an
With spare capacity at just two million barrels per day, he
saw little slack in the system. "That's a critical level," said
Gross. He argued that Iraq's production increases would have to
accelerate to make sure the market was balanced.
"It's likely that prices will just go higher and ration
demand at some point, largely in the OECD (Organisation for
Economic Co-operation and Development) countries."
Michael Rothman, president of Cornerstone Analytics, a
research firm, said oil is used differently today than in the
1970s, when some 30 percent of the barrel went into heating and
power and it was relatively simple to substitute oil with coal
Now transport is a much bigger part of the barrel and there
are few alternative fuels. As a result, a much higher oil price
will be required to ration demand, and that demand destruction
is likely to be felt in the OECD rather than nations where oil
All three panellists, who were speaking at the World
Commodities Week conference, expressed doubts that Iraq would
meet its targets and that Libya would be able to ramp up
"The amount of crude coming out of Iraq will be
disappointing," said Hall. "And Libya won't come back for six
months to a year."
Rothman said that even though ousted leader Muammar Gaddafi
had been killed, the biggest concern in Libya was still civil
"The companies that have a strong vested interest in
maintaining their presence there are putting on a hopeful face
but the reality is that things will be slower."
Even if Libya were able to get to one million barrels per
day by the middle of next year, the effective OPEC spare
capacity would still be between zero and 1 percent, he added.
With Iraq, he said anyone who argued there would be a sharp
rise in oil output was being unrealistic. "They are still
producing less oil than they were before the war," he pointed
"They were supposed to be at 3.5 million by 2005, 5.5
million by 2008 and 8.5 million by next year. We're at 2.7
million and over the last several months we have seen arms
flowing in from Iran."
With the U.S. troop presence dropping to zero next year, he
said there was a high risk of civil unrest.