For Oil in Asia, It's All Uphill From Here

With crude-oil demand no longer slipping, the Asian oil market is looking up. But global economic growth is still a concern.
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For the most unlikely crude oil demand indicator, look to South Korean weddings.

South Korean officials expect a 25% jump in nuptials this year, which in turn should boost consumer spending by as much as $10 billion. And that offers evidence of an economic turnaround in Asia.

It's this embryonic turnaround that has oil pundits talking about an arrest in crude-oil demand declines this year in Asia, a crucial market for the oil industry. Japan alone is the world's second-largest oil consumer. Add in China, and the two countries consume roughly 10 million barrels per day, or about 13% or the world's total.

Throughout much of this decade, fast-growing Asian economies spearheaded the steady petroleum demand growth the industry came to see as normal -- about 1 million barrels per day in incremental petroleum demand per year came from this region alone. That helped push world demand growth for much of this decade to nearly 2% per year.

But a drastic reversal in 1998 saw petroleum demand from Asia actually contract by 500,000 barrels a day -- right about the same time


and Iraq increased the supply. Overall global growth in crude demand last year, at 240,000 barrels per day, was the lowest since 1985, according to

Cambridge Energy Research Associates

. That led to an extraordinary buildup in crude inventories, which pushed prices down to gut-wrenching levels.

Now with OPEC's March agreement to slash production, attention is shifting to the other side of the equation -- demand. And nowhere is that attention more acute than in Asia.

"Global demand will grow simply because of the lack of decline in Asia," says Marianne Kah, chief economist at



in Houston. "The net improvement could be 500,000 barrels per day."

South Korea alone could see demand growth of 4% to 5%, Kah says. That would translate to between 80,000 barrels and 100,000 barrels per day based on its estimated consumption this year, according to Cambridge.

In Japan, things are looking up, too, if ever so slightly. The economic contraction is slowing, according to a recent report from the

Economics Planning Agency

. The main benchmark for Japan's stock market, the


, is up 15% this year. Japan has also reportedly instituted massive tax cuts designed to spur consumer spending and will cut fees on securities transactions, which is expected to boost shares.

But it's not yet time to throw down and dance in the aisles. Global economic growth, especially in Europe, is a concern, says Kah. Others are still concerned about Asia, particularly China and Japan.

Japan and China "remain a wild card for those of us trying to forecast," says Pat Hughes, an analyst at



in Walnut Creek, Calif.

For example, there are indications that China may be cutting its refinery production and therefore its crude imports. That's a potentially bad sign for the market since China's demand had held steady between 4 million and 4.2 million barrels per day throughout the crisis, according to the

International Energy Agency

. So China's demand could be shrinking more than the market knows about, Hughes says.

The region is definitely still in flux, he says. He sees little growth in demand this year and is waiting to see what happens over the next several months with OPEC as well as with the actual level of production from non-OPEC producers due to cuts in spending, fallout from the low prices.

Of course, supply still remains key. After all, the crude oil supply/demand balance will determine inventory levels, says Tim Evans, a senior energy analyst at

Pegasus Econometric Group

in New York. If OPEC compliance with the announced cuts is poor in the coming quarter, inventories won't fall. With better compliance, he notes, the market can expect a deficit of 100,000 to 200,000 barrels per day in the second quarter, which would begin to work off excess inventory.

Observers put the crude inventory overhang at about 150 million barrels over 1996 and 1997 levels, when oil prices averaged about $20 and $24 per barrel, respectively. But if demand does indeed show signs of life and supply falls, by the end of the year, "the market is going to be squeaky tight," says Evans.