Oil Market's Attention Shifting from Supply to Demand

by shariff mohammed | Dec 09, 2015


Non-OECD demand is expected to hold up, regardless of the fragility in the Chinese economy, with yearly rises in Chinese oil demand forecast at 3.6 percent. Overall, the continued moderate pace of global economic growth will result in 1.4 percent year-on-year global oil demand growth, with similar annual growth rates in 2016. Quarterly Oil Market Update reort of Jadwa Investment

Brent oil prices averaged $50 per barrel (pb) in Q3 2015 compared to $61 pb in Q2 2015 and we see little upside on oil prices considering global oil surpluses will remain above 1 million barrels per day (mbpd) in Q4 2015 and early 2016.

Crude oil output from non-OPEC sources dropped for the first time in four years, on a year-on-year basis, in Q3 2015, as low oil prices began to impact US shale oil growth. US crude oil production growth will contract at a more rapid pace in the last quarter of 2015 and show negative growth in 2016.

Both Saudi Arabia and Iraq saw the largest year-on-year increases in OPEC supply in Q3 2015 pushing the organization's output to a two year high of 32 mbpd. The battle for market share within OPEC is likely to see output elevated at 32 mbpd in 2015 and 2016, contributing to keeping oil markets oversupplied.

Latest data available shows that Saudi year-to-August exports were up 3 percent year-on-year, at 7.38 mbpd, below ten year highs of 7.54 mbpd, recorded in 2012. Saudi Arabia will not change course on its strategy of retaining market share and we therefore see exports remaining at around current levels for the remainder of 2015 and 2016.


Oil Demand

 

Brent oil prices dropped 18 percent, quarter-on-quarter, in Q3 2015 as attention turned to the demand side of the oil market. Question marks were raised over Chinese economic growth while the International Monetary Fund (IMF) downgraded its forecasts for global GDP growth in October. Brent oil prices averaged $50 pb in the third quarter, compared to $61 pb in Q2 2015. Looking ahead, the outlook for oil demand remains modest in 2015 and early 2016. Only Canada and the US, which account for 52 percent of OECD demand, are contributors to growth in the OECD. Weak economic growth from the EU and Japan will continue as a drag on oil consumption. Non-OECD demand is expected to hold up, regardless of the fragility in the Chinese economy. OPEC data points to yearly rises in Chinese oil demand by 3.6 percent whilst India will increase 3.7 percent and Middle East by 2.5 percent. Overall, the continued moderate pace of global economic growth will result in 1.4 percent year-on-year global oil demand growth, with similar annual growth rates in 2016.

In the US (21 percent of global oil demand), the sharp drop in benchmark crude West Texas Intermediate (WTI) since the middle of last year is stimulating demand. According to the US Federal Highway Administration, the volume of traffic on US roads in the first half of 2015, measured in vehicle-miles traveled, was up 3.5 percent, year-on-year. Rising US oil demand, however, will provide limited support to international or domestic crude oil prices since a build-up of commercial crude and gasoline stocks will not translate into a large rise in imports.

Lower year-on-year oil prices have not jolted oil demand in Europe (14 percent of global oil demand), so far, as demand grew by a modest 1.2 percent in Q3 2015, year-on-year. Structural factors such as improvements in fuel economy standards and low levels of economic growth have seen the region’s long-term oil demand trend downwards. As such, oil demand is likely to grow at similar rates in Q4 2015 but trend downwards in 2016.

Concerns over future Chinese (12 percent of global oil demand) oil demand (and other commodities) have arisen after weak economic data suggests that the economy may not reach growth at around 7 percent GDP, as targeted, in 2015. Manufacturing PMI’s are at their lowest since March 2009 whilst investor sentiment has dampened. The government has responded by devaluing the Renminbi to boost exports and by pumping liquidity into the financial system. Although economic growth is likely to be weaker than forecasted, we do not see this adversely impacting oil demand in Q4 2015 and 2016. Firstly, China's gasoline demand, which accounts for around 30 percent of oil demand growth, will be boosted by lower pump prices and increase in sales of sport utility vehicles (SUVs), up 50 percent so far in 2015 year-on-year. Also, changes in the structure of China’s industrial base will ensure the rise in the use of liquefied petroleum gas (LPG), which contributes around a third of oil demand growth. Secondly, continued stimulus measures designed to boost industrial activity will aid oil demand. Lastly, opportunistic buying by China at a time of low oil prices in an efforts to boost commercial crude stocks will also contribute in keeping annual oil demand at around 3 percent year-on-year, in both 2015 and 2016. Latest data shows that oil imports have remained robust with a 10 percent year-to-August rise with same period last year and 3.4 percent rise in Q3 2015 year-on-year. We also expect to see a similar growth in oil demand of around 3 percent in Q4 2015.



Oil Supply

 

Crude oil output from non-OPEC sources dropped for the first time in four years in Q3 2015, on a yearly basis, as low oil prices began to impact US shale oil. OPEC data shows that non-OPEC supply dropped by 650 tbpd in Q3 2015 year-on-year. Looking ahead, further declines are expected in non-OPEC oil supply in Q4 2015, leading to a slowdown in the annual growth in oil output in 2015. For 2015 as a whole we expect to see a 1.6 percent year-on-year increase, down from an average yearly increase of 2.3 percent between 2010-14. Elevated levels of production from Russia will ensure growth, albeit modest, in non-OPEC oil supply, at 0.6 percent year-on-year, in 2016. In addition, the battle for market share within OPEC will lead to year-on-year rises from the organization too, in both 2015 and 2016, and will contribute to keeping the oil market oversupplied.

US shale oil maintained growth despite low oil prices, as cost-cutting measures and hedging is allowing year-on-year production rises, so far. According to the latest Energy Information Agency (EIA) data, total US oil production is estimated to have increased by 4 percent, in Q3 2015 year-on-year. However, on a monthly basis US shale oil production is starting to show signs of slower growth. Month-on-month growth in shale has been negative since May 2015. The expected lower price environment going forward will increase financial pressure on shale oil companies, especially some smaller and midsized one. This will result in US crude oil production growth contracting at a more rapid pace in the last quarter of 2015, with the EIA forecasting falls by 2 percent, year-on-year. Full year US crude production growth in 2015 will not be negative but it will slow to 6 percent year-on-year, compared to an average growth of 16 percent between 2012-2014. If this pace of decline in shale oil continues we will see the first negative annual growth in US crude production since 2008, at minus 4 percent year-on-year in 2016.

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