WSJ: Global Demand Growth for Oil May Fall by a Third in 2016
Easing demand from this year’s record level likely to add further strain to crude market
By GEORGI KANTCHEV and MARGARITA PAPCHENKOVA
Oct. 21, 2015 8:23 a.m. ET
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After hitting a five-year high in 2015, the global growth in demand for oil is expected to fall by about a third next year, adding further strain to an already oversupplied crude market.
A 40% decline in the price of oil since last year has boosted demand, encouraging motorists, consumers and companies to top up. But the economic slowdown in China and elsewhere in Asia could sap that demand, according to analysts and big energy watchdogs.
Just how far that growth in demand will fall is unclear.
“We’re seeing pretty solid demand growth this year, but the big question is what will happen next year,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, which oversees $126 billion.
Sergey Frank, Chief Executive of Russia’s largest shipping company, Sovcomflot, said its net profit have more than tripled this year as cheaper crude keeps fuel costs low and demand high for the oil products that he ships around the world.Now, Mr. Frank is preparing for the worst as he plans his shipping routes for next year. “Today there is favorable wind but tomorrow there could be headwind on the market,” he said.
The International Energy Agency, an energy watchdog, forecasts global oil demand growth falling from 1.8 million barrels a day this year to 1.2 million next year. The Organization of the Petroleum Exporting Countries, the 12-nation oil cartel, expects demand growth to fall to 1.25 million barrels a day, and some analysts see demand dropping even lower.
Falling global demand growth comes amid a continued glut of crude that has driven prices to less than $50 a barrel, from $100 a barrel just over a year ago. Booming U.S. output has slowed this year, but other major producers, from Saudi Arabia to Russia, have continued to pump crude at a fast pace in a bid to defend, and win, market share.
On Wednesday, Brent, the global oil price gauge, was trading at $48.30 a barrel.
Strong demand for crude this year comes as cheap oil boosts sales of gas-guzzling SUVs in the U.S. and countries like China use the lower prices as an opportunity to fill up their strategic oil reserves.
Prices of gasoline have fallen by around a third in the U.S. from last year. Transport demand has accounted for 80% of oil demand growth in the past two decades, according to Barclays PLC.
“Oil is a consumer product—when it’s cheap, people buy more of it and drive further,” Tony Hayward, former chief executive of BP PLC and chairman of oil producer Genel Energy PLC, told The Wall Street Journal. “That’s true in China, that’s true in Europe, that’s true in the U.S.”
To be sure, not everybody sees a falloff. The U.S. Energy Information Administration pegs demand in 2016 at 1.41 million barrels a day, up from 1.31 million this year.
But for most analysts, demand growth is expected to fall sharply, with worries about the Chinese economy fueling that weak outlook. On Monday, China reported that its economy grew by 6.9% in the third quarter, its slowest pace since 2009. The International Monetary Fund sees Chinese GDP slowing further to 6.3% next year.
The IMF also cut its overall global economic growth forecast to 3.1% from 3.3%, its weakest expansion since the financial crisis. Global economic growth typically has a strong correlation with oil demand.
“China’s decline in GDP [growth] suggests that the main global oil demand growth engine is not going to be the solution to the oversupplied oil market,” said Dominick Chirichella, an analyst at Energy Market Analysis.
How deep the decline in demand growth will end up is adding an element of uncertainty into the analysis of the oil market. There is a difference of 210,000 barrels a day between where the IEA and the EIA energy watchdogs see average oil demand growth next year, while Swiss bank UBS says it will finish even lower, at 1.1 million barrels a day—some 300,000 barrels a day lower than EIA’s estimate.
Such small variations in the forecasts matter a lot to the investors and analysts trying to work out when the oversupply in this market will end.
“We are walking a very fine line, where a slight difference in assumptions is capable of moving the oil market into undersupply as early as mid-2016 or as late as…early 2017,” said Pascal Menges, manager of the Lombard Odier Energy Fund.
