Oil Demand Growth Slowdown Isn’t Over Yet

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By Irina Slav

Two energy authorities reduced their crude oil demand outlooks in their latest reports. The U.S. Energy Information Administration cut its demand growth outlook by 70,000 bpd in its latest Short-Term Energy Outlook, and the International Energy Agency lowered its own by 100,000 bpd.

At first glance, the numbers are not particularly impressive. A closer look, however, reveals these numbers support a growing worry about a slowdown in global oil demand that has already begun weighing on prices and will likely continue to do so in the observable future.

The problem, as usual, is with assumptions. Bloomberg’s Julian Lee wrote this week how the downward revisions have been going on for a while now, based on hard demand data replacing forecasts based on predictive models. Basically, the hard demand data is saying the world is not as thirsty for oil as forecasters kept expecting.

Here, the changes are not as insignificant as 70,000 bpd. In fact, both the IEA and the EIA cut their demand growth estimates for the second quarter of the year by as much as 900,000 between January and June. In January, second-quarter demand growth was seen at 1.6 million bpd. In June, that number was revised down to 700,000 bpd as actual demand data started coming in.

Every agency making a forecast about the fundamentals of any commodity is forced to make a number of assumptions. The information is never complete and markets are dynamic, as are geopolitics. In the case of oil, one of the assumptions that turned out to be wrong was the one about the U.S.-China trade war.

For a while in the spring things were looking up, with talks ongoing and Washington officials signaling they were getting close to a resolution. Then President Trump tweeted the talks were taking too long and threatened another round of sanctions. That’s on top of the Huawei affair that didn’t help heal bilateral relations, either. Beijing responded in kind and by the beginning of this month the conflict had escalated so much, there was talk about a currency war brewing when the Chinese central bank let the yuan fall to its lowest to the greenback in a decade. Sometimes it takes just one wrong assumption for a fundamentals forecast to lose any relevance and this is one of these cases. The U.S.-China trade war was the reason economists gave as basis for their expectations of slower global economic growth in a recent survey conducted by German economic institute Ifo.

“The experts expect significantly weaker growth in world trade,” the president of Ifo, Clemens Fuest told Reuters. “Respondents also expect weaker private consumption, lower investment activity, and declining short- and long-term interest rates.”

This is an indication that there will be further demand revisions and they will not be upward unless a miracle happens between Beijing and Washington. There is also new talk of further OPEC cuts.

OPEC starts dropping hints of new or extended cuts every time oil prices start sliding down. Yet for it to do so right now, when cuts are both extended and greater than planned because of the sanction situation in Venezuela and Iran, means that things on the demand front may be even bleaker than the IEA and EIA revisions suggest.

Crude Oil

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