Barring the sentimental uptick on an expectation of a production freeze in Algiers, the fundamentals of oil seem to be pointing towards another leg down. The International Energy Agency has gone ahead and reduced the global demand picture for this year and next.
The oil bulls have been advocating for higher oil prices, citing growing demand and a slowdown in supply. However, the recent IEA report suggests that the opposite is true: Oil demand is slackening, while production is on the rise.
During the third quarter of this year, oil demand growth slid to a two-year low of 0.8 million barrels a day. On the other hand, OPEC increased its output by 640,000 barrels a day since May. The main contributors to the rise are Kuwait, Saudi Arabia, and the United Arab Emirates.
Is there an opportunity for the demand forecast to be revised upwards?
The current global economic conditions don’t support a major upward revision in the global demand picture. Amid the debate about the limitations of the central banks and their monetary policies as well as a possible global economic slowdown, the demand picture for oil looks weak.
China and India have used low oil prices to shore up their Strategic Petroleum Reserves. However, as China doesn’t report its storage regularly, the data and the expectations of the experts are skewed.
While JP Morgan believes that the Chinese are close to topping up their SPR, Energy Aspects believes that new commercial storage capacity additions will sustain the increased demand from China. The difference between the two possibilities accounts for a huge difference of 1.1 million barrels a day.
Nevertheless, with reports of a likely debt crisis or a hard landing in China, chances are that the oil demand from the world’s second-largest economy will remain flat or see muted growth in 2017.
On the other hand, the OECD countries have stockpiled on crude, and the July figures reached 3.1 billion barrels, which is another damper to oil prices.
Though some optimistic bulls state that the long-term average of an increase in global demand for crude oil is 1.1 million barrels a day, they miss the point that since 2010, the demand growth skyrocketed to 1.5 million barrels a day.
Hence, an increase of 1.3 million barrels a day in 2016 and a further slowdown to 1.2 million barrels a day for 2017 shows that the demand growth is decreasing, even though crude oil prices have quoted below $50 a barrel for most of this year.
“Recent pillars of demand growth China and India are wobbling. After more than a year with oil hovering around $50/bbl, the stimulus from cheaper fuel is fading. Economic worries in developing countries haven’t helped either. Unexpected gains in Europe have vanished, while momentum in the US has slowed dramatically,” the IEA report noted.
Even if we look at the possibility of a demand growth in 2018, the picture is not very promising. History suggests that the US is likely to enter a recession within the next two years. China’s borrowing-led growth is also not likely to sustain much longer and is prone to downside risks.
“There is a general gloom about the European countries right now, and Brexit is another nail in the coffin,” IEA senior economist Matthew Parry said in an interview, reports The Globe And Mail.
With every major global crude oil supplier, barring the US, is attempting to increase production and demand stuttering, it is time for the oil bulls to go back to the drawing board and reassess their figures. Unless we see a major oil disruption, oil supply will continue to outpace demand.
By Rakesh Upadhyay for Oilprice.com
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