India crude demand ‘galloping’, China’s holding up – IEA

LONDON (ICIS)–Despite signs of a slowdown in the global economy, demand for crude oil continues at a healthy rate with China beating expectations and India’s demand “galloping” to its fastest pace in the last 10 years, the International Energy Agency said on Friday.

The IEA’s monthly Oil Market Report pointed to India becoming the new major consumer of crude oil products after the Chinese economy transits from a manufacturing-based economy to a services model. In a presentation of its World Energy Outlook 2015 on 10 November, the IEA’s executive director Fatih Birol said India is set to become the country where demand growth will expand the most.

“India [demand is] galloping to its fastest pace in more than a decade… Supported by strong gains across the barrel, particularly diesel and gasoline. AS Aristotle warned, ‘one swallow does not make a summer’, but with increased economic optimism, an ambitious road building programme and rising car sales, relatively robust Indian demand conditions are expected to hold,” said the IEA.

The IEA’s analyst covering petrochemicals, Fabian Kesicki, tipped India on 12 November as the next country in which derivatives of crude oil will boom as the country industrialises in coming decades.  

Meanwhile, Chinese demand for crude oil, which rose by 800,000 bbl/day year on year during the third quarter, also “beat earlier expectations”.

Looking ahead, the IEA kept unchanged its October forecast for crude global demand growth, which it expects will slow to 1.2m bbl/day in 2016 after having surged to a five-year high in 2015 at 1.8m bbl/day.

LPG: Liquefied Petroleum Gas. RFO: Residual Fuel Oils. RHS stands for ‘right hand side’ (percentage change). Source: IEA

The Paris-based agency highlighted how stockpiles are currently standing at a record 3bn barrels, “providing world markets with a degree of comfort”, a cushion which has inflated as prices adjust to around the $50/bbl mark.

“But gains in demand have been outpaced by vigorous production from OPEC [Organisation of Petroleum Exporting Countries] and resilient non-OPEC supply – with Russian output at a post-Soviet record and likely to remain robust in 2016 as well,” said the IEA.

The Agency said stocks of the European and US northeast heating fuel of choice, diesel, are now “brimming” by over 84m/bbls between February and August, totalling 600m/bbls.

“Between February and August, OECD middle distillate stocks surged by over 84m bbl. By end-August they stood close to 600m bbl, their highest absolute level since 2010. By end-September they remained a comfortable 36m bbl above average and 49m bbl above a year ago,” the IEA said.

“This could protect the market from a supply crunch should there be a lengthy spell of cold temperatures. But the current fore4cast if for a mild winter in Europe and the US. IF it turns out to be true, bulging stock levels will add further pressure and oil markets bears may choose to hibernate,” it added.

On the supply side, the IEA said the world’s availability of crude oil surpassed 97m bbl/day during October on the back of rebounding non-OPEC supply, while OPEC crude oil output held steady during the month with higher output from Libya, Saudi Arabia and Nigeria offsetting reductions from countries including Iraq and Kuwait.

IEA’s forecast for OPEC output in 2016 was lifted by 200,000 bbl/day to 31.3m bbl/day, while non-OPEC’s supply has been downgraded slightly to 57.7m bbls/day next year, down by 600,000 bbl/day, on the back of reductions in output from US light tight oil (LTO) and despite the “resilient production in a number” of producer countries.

“Continued declines in US drilling activity suggest steeper drops in US LTO output lie ahead. Producers pulled another 36 rigs out of service in October, to 578, and the number of new wells completed dropped to 800, the lowest rate since February 2011. As a result, US LTO production is forecast to contract by 600,000 bbl/day next year compared with declines of 400,000 bbl/day expected previously,” said the IEA.

NGLs: Natural gas liquids. Source: IEA

Crude oil prices continued to be marked by oversupply, which impedes gains, aided by a strengthening US dollar over the course of 2015, the currency in which crude is traded.  

Although some geopolitical events – Russia’s involvement in Syria, strikes in the crude oil industry in Brazil or disruptions to Libyan output – took prices to a “short-lived” rally at the beginning of November, European referential Brent retreated to $44/bbl levels after having briefly touched the $50/bbl threshold.

Northern hemisphere autumnal “full swing” refinery maintenances made the global refinery throughput fall in October to 78.2n bbls/day, down 1.2m bbls/day, although they are expected to return to higher levels in November and December to 79.8m bbls/day and 81m bbls/day, respectively.