IEA estimates that the dimmer economic outlook to cloud oil demand in 2017
Demand growth for crude oil in 2017 will suffer from a “dimmer macroeconomic outlook” on the back of downward revisions to global GDP growth following the UK’s vote to leave the EU, IEA, the International Energy Agency said on August 11, 2016
Based on the July estimate from the International Monetary Fund (IMF) which predicted that global GDP would slow to 3.4 % from 3.5 % in 2017, the IEA now forecasts that crude demand growth next year will average 1.2 million bbl/day, a decrease of 100000 bbl/day compared to the Agency’s Oil Market Report published in July 2016.
Although it did not revise its projections at that time, the IEA mentioned global economic uncertainty as a factor weighing down the crude oil markets. Crude oil demand growth in 2016 is still expected at 1.4 million bbl/day.
“The subtitle of the [IMF’s] July report – Uncertainty in the aftermath of the UK Referendum – encapsulated the spirit of the update: ‘the outcome of the UK vote, which surprised global financial markets, implies the materialisation of an important downside risk for the world economy’,” the IEA cites.
“As a result, the global outlook for 2016-17 has worsened. The UK suffers the most, with 0.9 percentage points trimmed from its 2017 economic growth outlook to 1.3 %, but the rest of Europe will also be hit as trade prospects and confidence (business and consumer) suffer, with the GDP forecast for the euro area trimmed by one-fifth of a percentage point to 1.4 %.”
A slowdown in crude oil demand growth this year has already been noted. Annual growth of 1.4 million bbl/day would itself represent a decrease from the start of the year when demand growth for crude oil averaged 1.6 million bbl/day during the first quarter 2016.
The third quarter is expected to conclude with average demand growth of just 1.2m bbl/day, although it will pick up in the last quarter of the year to 1.5m bbl/day as the winter season sees an increase in demand for heating fuels “assuming normal winter temperatures” in the northern hemisphere, said the IEA.
Demand for crude oil is decreasing even in India, a country which, on the back of China’s transition to a services-led economy, was deemed to become the latest large consumer of oil and its products.
“The rapid pace of Indian demand growth has eased dramatically in recent months due to June’s sharp slowdown in gasoline and diesel demand growth as well as stuttering petrochemical use during May,” said the IEA.
The Paris-based agency said the decrease in crude oil prices registered during past weeks was related to the crude oil glut returning to the headlines “even though our balances show essentially no oversupply” taking place during the second half of the year, it said.
“When it comes to the recent price decline, the dynamics of the crude oil market hold the key. Crude oil – still the largest part of the global oil market – has its own fundamentals that are not necessarily in sync with the total liquids market (including biofuels and natural gas liquids that not only never see a refinery but also compete with refined products),” said the IEA.
“Oil rallied during May and June, just as most refiners were buying their crude to process during the third quarter, when we expect to see record high runs. So why have prices trended lower? Refinery throughput in fourth quarter 2016 is due to decline seasonally as autumn maintenance cuts runs, while supply sees a quarter-on-quarter increase.”
The IEA went on to say oil prices could already be pricing in a weaker fourth quarter, year on year, while the “massive overhang” of stocks would also keep prices subdued.
In a theme also reported on 10 August by OPEC, the Organization of the Petroleum Exporting Countries in its own Monthly Oil Report, the IEA said that since late 2014 refinery runs – the products being processed out of crude oil – have been increasing while demand for refined products globally have been decreasing.
“Oil price rallies this year would have extended more if not for the resistance from [crude oil] product prices… As crude prices rose, refinery margins fell, dampening appetite for crude. Hence, in 2Q16 refinery throughput declined 500000 bbl/day year on year, the first annual drop of this scale since the Great Recession of 2008-2009,” said the IEA.
“Even in China, the world’s second largest oil consumer, rapidly expanding independent refinery runs forced oil majors Sinopec and Petrochina to cut throughput as markets could not absorb the product oversupply.”
The Agency went to say that it expects the refined products’ stock draw which commenced in the second quarter of this year to “carry on” with the expected healthy crude intake expected during the third quarter unable to absorb the total oil demand growth.
“The same goes for fourth quarter of 2016. Thus, we expect more subdued growth in refining activity, with runs lagging total oil demand growth for all but the first quarter this year – hardly good news for the crude oil market in the short term,” it said.
“But there is no gain without some pain. The resulting product stock draw will increase refiners’ appetite for crude oil and help pave the way to a sustained tightening of the crude oil balance.”