Global oil demand may be a bit lower this year than previously thought, weighed down by weaker consumption rates in emerging markets.
The International Energy Agency lowered its demand growth projection for 2019 by 90,000 barrels per day to 1.3 million barrels per day (mb/d). It also revised down its 2018 demand figure by 70,000 bpd to 1.2 mb/d.
In the first quarter, demand in Brazil, China, Japan, Korea, Nigeria, and elsewhere came in lower by about 410,000 bpd than the IEA previously expected. First quarter demand was up 640,000 bpd from the same period a year earlier, but that was down from last month’s forecast of a 1 mb/d year-on-year increase. Importantly, while non-OECD demand was up strongly, OECD demand actually contracted by 300,000 bpd in the first quarter, the second consecutive quarterly decrease.
The agency said that the dip is likely temporary, and demand should pick up over the course of the year. The first quarter may be chalked up to a “tough quarter rather than the start of a new trend,” the IEA said.
But the lower demand figure ultimately meant that the global oil market was in surplus in the first quarter by about 0.7 mb/d, a larger glut than expected.
“As we move through 2Q19, while there is considerable uncertainty on the supply side, it is highly likely that the implied balance will flip into an indicative deficit of about the same size,” the IEA said in its report. “Stocks in the OECD at the start of April have fallen back to the level seen in July in terms of days of forward cover and other stock indicators are pointing in the same direction.”
But the U.S.-China trade war could complicate this rather sanguine outlook. The OECD estimates that last year’s round of tariffs shaved off a quarter percentage point from GDP in both countries. The latest increase in tariffs could double the impact to a half percentage point by 2020.
Another potential round of tariffs looms. Trump threatened to put levies on the remaining $300 billion or so of Chinese imports, which could happen in a few months if a deal is not reached. If that occurred, GDP would dip by three quarters of a percentage point and global trade would fall by 1 percent. “Needless to say, such a downward revision to GDP and trade growth would have negative implications for oil demand,” the IEA warned.
On the supply side, the outlook is “confusing,” the IEA conceded. Rapid declines in Venezuela and Iran combine with unrest in Libya and the sudden flare up of attacks in the Arabian Peninsula. The contamination issue related to Russian oil traveling through the 1.4 mb/d Druzhba pipeline will be resolved “in due course,” but it could result in a “loss of confidence in the quality” of the oil coming from Russia, which may “intensify price pressures for heavy/medium sour crude oil,” the IEA added.
Overall, global oil supply declined by 300,000 bpd in April to 99.3 mb/d, “led by losses in Canada, Kazakhstan, Azerbaijan and Iran,” the IEA said. However, production increases in Brazil, the U.S., and (surprisingly) in Libya and Nigeria mitigated the supply losses.
Some of the outages are related to maintenance, which should ease. In June, for instance, maintenance in the North Sea is expected to take some barrels offline for a period of time. However, even as these projects come back online and supply rebounds, the “pace of growth will ease further,” the IEA said.“A slowdown in drilling, lower capital allocations and faster base declines underpin our weaker growth projections for the US,” the IEA said. “Expansions in Canada, which averaged nearly 400 kb/d last year, have stalled and further declines are expected in the North Sea.” Higher spending in China could reverse losses, while production should grow in Brazil.
In total, non-OPEC supply growth is expected to reach 1.9 mb/d this year, down from 2.8 mb/d in 2018.
Putting it together, prices are largely trading at about the same levels as a month ago, but the one notable change is the shift in the futures curve. A steeper backwardation – in which near-term contracts trade at a premium to longer-dated futures – suggests tightness in the market. As the IEA notes, front-month oil futures are trading $3 per barrel higher than contracts six months out.
The end result is that the oil market is sending “mixed signals,” the IEA said. Weaker demand combined with supply outages and slowing but still significant production growth – it paints a confusing picture in which the market is tightening, but not overly so.
By Nick Cunningham of Oilprice.com
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