(EnergyAsia, October 22 2012, Monday) — With the global economy stalling and oil demand growth curtailed, oil prices will become “somewhat disconnected” from market fundamentals for the remainder of 2012, said consultant Ernst & Young.

Fears of demand destruction were underscored when Saudi Arabia, the world’s largest exporter of oil, expressed concern about the impact of rising oil prices on demand. The onset of winter in the northern hemisphere should provide a seasonal upswing in oil and gas demand. However, it will take an unusually cold winter to trigger a sustained rally in oil and gas prices.

Concerns over the health of the global economy have prevented oil prices from reaching the highs achieved in the first quarter of the year, said Ernst & Young in its 4th quarter outlook on the oil markets.

Early optimism over economic growth has evaporated as the year has progressed and any slowdown in economic activity in China could result in global oil demand projections in the future being revised downwards again. China is expected to account for almost one-third of the gain in global oil demand in 2013 as forecast by the International Energy Agency.

But firmer prices in the third quarter will underpin investment by oil and gas companies despite the wider economic uncertainty, said.

“Healthy cash balances among the better capitalised companies and the need to replace reserves will drive increased investment activity in Q4 continuing into 2013,” it said.

“Macro-economic indicators and geopolitical tensions are likely to be the main factors driving oil price sentiment in the final quarter of the year. Geopolitical events have the potential to rattle oil markets even if there is no discernible disruption to supplies.”

Dale Nijoka, the company’s Global Oil & Gas Leader, said:

“This year, we’ve seen supply disruptions arising from political unrest in Libya, Yemen and Sudan. Tougher sanctions against Iran have also reduced supplies available to the market. Meanwhile, the conflict in Syria continues unabated with no promise of a resolution anytime soon. These tensions will help keep geopolitical concerns to the fore in the remainder of the year and will be supportive to oil prices.”

Meanwhile, unconventional plays will continue to attract investment, with Asia’s national oil companies (NOCs) particularly active acquirers in 2012, said Ernst & Young.

The Japanese government has announced a new long-term energy policy that will aim to phase out the use of nuclear power in the country by 2040. The policy change follows the March 2011 Fukushima Daiichi nuclear power plant disaster and is likely to serve to deepen Japan’s dependence on imported supplies of oil and gas.

“A policy shift means we may see Japanese energy companies engage in further deals or partnerships to secure access to supplies. While deals to date have focused on shale and oil sands assets, proposed North American LNG export projects are also likely to be prime future targets for Asian investors,” said Mr Nijoka.

Beyond North America, development of unconventional resources is progressing at a slower pace but is gaining momentum.

According to Ernst & Young, China is hoping to attract investment to kick-start development of its shale gas resources. Its government has launched a tender for 20 shale gas blocks and foreign-funded joint ventures that are controlled by Chinese investors will also be allowed to participate.

Argentine company YPF and Chevron have signed an accord to consider jointly exploring for shale oil and natural gas in the country’s Vaca Muerta field.

In contrast, progress in Europe has slowed in the face of public opposition and poor initial exploration results. The Czech government has imposed a ban on shale gas exploration licenses until June 2014. In Poland, exploration results to date have been disappointing and companies are relinquishing licences.

Mr Nijoka said: “Shale gas resources have the potential to play an important role in the world’s future energy mix. However, the reality of the challenges involved in developing these resources in many countries means that the global potential may not be fully realized for another decade. Beyond North America, the shale gas development story is going to be one of evolution rather than revolution.”