By Irina Slav
Despite oil prices trading in a range that should have stimulated a notable improvement in consumption, the world actually consumed just 1.6 percent more oil between June and August this year than last, data from the Joint Organisations Data Initiative has shown.
Reuters’ John Kemp quotes the data, noting that this lackluster demand growth was the fastest growth rate since the start of the year and followed a consumption decline in the previous three-month period, but added that most of this growth came from China. And if it weren’t for China, the picture would look even worse.
Excluding China, the 18 largest consumers of oil globally would have recorded a combined consumption decline of 0.9 percent in June-August.
The spike in oil consumption in China is easily explained: a 400,000-bpd new refinery came on stream in May this year and another one with the same capacity was put into operation later. This spurred a jump in oil imports that may not reflect consumption trends accurately or simply do not fit with economic growth figures.
But even if China’s economy has not been growing as strongly as before, it is growing, unlike some other large economies.
European economies are trudging along, doing little more than hanging on, with the European Union’s economic engine, Germany, narrowly avoiding a recession in the third quarter.
India has been posting positive growth rates, but these have been slowing down for six quarters in a row, and analysts are revising their future growth projections downward.
Elsewhere, manufacturing activity has been weak, Kemp notes, and freight movements have declined, too.
The American economy has indeed continued to grow, but this does not mean that talk about a recession around the corner has ended. Whatever the Fed or any other agency is saying, the worry persists.
Of course, the continuing trade war between the U.S. and China has also had its part to play, though arguably not as large a role as the heightened tension in the Middle East, which resulted in higher freight rates after insurers upped their premiums for tankers passing through the Gulf. Between April and June, insurance rates soared tenfold, no doubt affecting oil consumption.
The consumption situation is not particularly optimistic for oil prices and yet, as Kemp noted in an earlier column, a lot of oil traders are still bullish for 2020, despite a number of forecasts that should cause pessimism, with the IEA, OPEC, and the EIA all expecting continued strong growth in U.S. oil production that will weigh on the global balance between supply and demand and tip it into a surplus.
It seems, however, that many are betting against these forecasts, expecting the effects of U.S. sanctions on Venezuela and Iran to continue having a limiting effect on supply while persistently low prices slow down the growth in U.S. shale production.
We are already seeing sings of a slowdown in U.S. shale as WTI stays below $60 a barrel.
The expectation of tightening supply leading to higher prices is not new. It’s been around for a while, but supply has yet to tighten enough to push prices substantially higher. It is also doubtful this will ever happen: large importers have become sensitive to price movements, and some of them—China specifically—have used the lower-for-longer situation to fill up its oil storages, so it can stop buying the moment prices become uncomfortably high. This would in turn push them back down.
In this context, any pickup in demand next year is likely to be in response to lower prices, as long as they fall low enough. Reports of another OPEC+ cuts extension, however, make this unlikely, unless traders factor in the cuts extension. It has happened before with OPEC cuts, which have seen prices fall rather than rise.