OPEC’s verbal intervention and output cuts have played a large part of lifting oil prices above $50 per barrel, but the demand outlook has also underpinned the market and will likely continue do so throughout this year, even though it might not be enough yet to spark a rally. There’s no doubt that the weak price environment which began during the second half of 2014 has stimulated oil demand. Growth has exceeded expectations over the past two and a half years, and so far in 2017, outlets have raised theirs forecasts while revising past numbers—signs that oil demand is overall robust and shows no signs of slowing down.
Besides OPEC, the demand outlook has also underpinned the market and will likely continue do so throughout this year, even though it might not be enough yet to spark a rally.
Just this month, some bullish news has surfaced on the demand side. The U.S. Energy Information Administration (EIA) said in its latest monthly outlook that growth would average 1.6 million barrels per day in 2017, some 400,000 b/d higher than the forecast a year ago. Furthermore, the agency increased its estimates for baseline demand for 2013-16, by about 900,000 b/d to account for higher levels in key non-OECD countries, most notably China. In other words, the world is using a lot more oil than originally thought. The EIA forecasts global oil demand to average just above 98 mbd in 2017, and according to its estimates, consumption will surpass a key milestone of 100 mbd during the second half of next year.
The International Energy Agency (IEA) also reported how demand is booming. In its latest Oil Market Report, the consumer watchdog lifted its estimates for Q4 2016 amid improved data for jet fuel and diesel in the OECD, putting the entire year at 1.6 mbd, up about 100,000 b/d from its January report. Moreover, the IEA lifted its 2017 forecast by 120,000 b/d to 1.4 mbd against the backdrop of higher industrial activity. Although this year’s growth is expected to be lower than 2016, that could change given the string of revisions we are now seeing. OPEC’s demand forecast isn’t quite as bullish as the others, but the cartel’s secretariat sees a healthier outlook, revising its 2017 forecast by 35,000 b/d to 1.19 mbd.
It’s the economy
The reasons for the positive demand adjustments touch every region, with stronger economic activity the main reason for the more optimistic outlook. With only minor fallout so far from Britain leaving the European Union and the change in administration in Washington, the global economy is expected to pick up this year as GDP grows by 3.2 percent. Non-OECD growth will again lead demand growth with a more than 1 mbd increase. At the same time, on the back of just under 2 percent GDP growth, the OECD should see demand rise by about 400,000 b/d, according to the EIA, a stunning reversal given how consumption leveled off in mature markets when oil prices were above $100.
Transportation fuels and consumer demand, along with industrial activity, will take the lead in underpinning growth.
Transportation fuels and consumer demand, along with industrial activity, will take the lead in underpinning growth. OPEC estimates that more half of projected increases will come in the transportation sector. In the U.S., gasoline demand, based upon the EIA, should remain flat for the year, but that is based on a weak first quarter. From April through December, however, demand ought to rise year-on-year as a confluence of factors contribute to a favorable situation for motorists. After increasing for much of last year, retail prices have stabilized and subsequently declined. Disposable income is on the rise and household expenditures on energy have fallen below levels seen in the 1990s.
Diesel and jet fuel are set to get a bump from greater economic activity. U.S. GDP growth is poised to be 2.6 percent in 2017, up .7 percentage points over last year, while manufacturing should also rise.
There are headwinds
Though there’s a growing consensus that demand will support prices throughout 2017, a number of factors keep this scenario from being inevitable. Structural problems plaguing different markets have not disappeared.
“Some headline risks have certainly faded, but there’s still a lot of uncertainty on the demand side.”
“Some headline risks have certainly faded, but there’s still a lot of uncertainty on the demand side,” said Jeff Quigley of Stratas Advisors, which forecasts growth of 1.3 mbd this year, bolstered by strong automotive trends in the developing world.
As Quigley points out, China is dealing with debt issues, sanctions are undermining Russia’s economy, Brazil is contending with corruption and violence, and low commodity prices hurt Middle East economies. Moreover, the euro zone remains sluggish, Japan is weak because of demographic trends, and the U.S. is still subject to policy uncertainty.
Even though oil demand is strengthening, it’s unclear if it can keep prices from grinding lower, since the supply picture remains bearish despite OPEC’s attempts to prop up prices with supply cuts.
Oil demand’s strong performance raises a number of issues. First of all, the massive price collapse, accelerated by OPEC’s decision in November 2014 to keep the market oversupplied, has given extra life to consumption after commentary and forecasts had foreseen slower growth and possibly even peak demand in the near-term when prices were high, at least in mature economies. Second, even though oil demand is strengthening, it’s unclear if it can keep prices from grinding lower in the short to medium term since the supply picture remains bearish despite OPEC’s attempts to prop up prices with supply cuts.
But over time as the supply picture shifts, the consumption numbers will matter more. The demand outlook is daunting for the longer term, particularly in light of companies slashing capex cuts in 2015-16 and OPEC’s return to production cuts. Should demand continue to rise at the pace we’ve seen the past few years, a supply-demand gap could eventually emerge once underinvestment in the oil sector bites.