LONDON (ICIS)--With developed nations holding 3,111m bbl of crude oil inventories, producers continuing to pump product into the market and demand growth slowing as China and India reduce their consumption, the global overhang has no end on sight, the International Energy Agency (IEA) said on Tuesday.
The Paris-based agency said global crude oil demand is actually slowing at a faster pace than initially thought with the third quarter seeing large declines – taking the full-year average in demand growth to 1.3m bbl/day, a 100,000 bbl/day cut to the IEA’s previous projection which was published in August.
The third quarter saw lower demand growth than expected in China, which was down 155,000 bbl/day compared to the second quarter, Europe, which was down 95,000 bbl/day and India, which saw lower demand of 55,000 bbl/day.
“The Chinese demand estimate was lowered, particularly for industrial fuels, as the economy continues to slow, while many factories were asked to close ahead of September’s G20 meeting in Hangzhou,” said the IEA.
“Stuttering industrial expansions curbed growth in India and Europe. Heavy monsoon rains further trimmed Indian oil demand. In Europe, preliminary 3Q16 [third quarter of 2016] data point to a return of the previously long-entrenched trends of falling European demand.”
Crude oil producers can only hope for a cold winter in the northern hemisphere to prop up demand for heating fuels, although the certainty of weather-related events is far from certain. At the same time, many countries are turning to other forms of energy for their heating.
“Even with a modest weather-related uptick forecast for the end of the year, oil demand growth in 2016 will struggle to get above 1.3m bbl/day. Refiners are clearly losing their appetite for more crude oil. During the fourth quarter, they are expected to process only 100,000 bbl/day more crude than a year ago,” said the IEA.
“The slowing 4Q OECD [Organisation for Economic and Co-operation Development, the 35 more industrialised nations] demand pattern shows the largest contraction in Europe, where the winter premium all but disappeared. In the two largest European heating markets, Germany and UK, natural gas now plays a more dominant role, while gasoil – the primary liquid heating fuel – is mainly used in households in remote areas.”
After slashing its global oil demand for 2016 by 100,000 bbl/day, the IEA also cut its projections for 2017. The agency says crude demand will hit 97.3m bbl/day – a downgrade of 200,000 bbl/day compared with its August forecast.
Despite slowing demand, crude oil producers keep pumping product into the markets. Although US production has been reduced, with its higher cost producers struggling to deal with lower prices, countries in the Middle East (Saudi Arabia, Iraq, Kuwait and the UEA) have increased their output.
In fact, Saudi Arabia overtook the US to become the world's largest producer of crude oil, said the IEA, proving that the Saudi strategy, started in late 2014 to defend market share at the expense of price, has been successful.
Crude oil markets were baffled by the IEA’s report on Tuesday, and by midday London time, both the international referential Brent crude futures for delivery in November and the US referential West Texas Intermediate (WTI) had lost more than $1/bbl.
“When will the world oil market return to balance? That is the big question today. With the price of oil at current levels, one would expect supply to contract and demand to grow strongly. However, the opposite now seems to be happening. Demand growth is slowing and supply is rising,” said the IEA.
“Our latest numbers provide some clues as to why. Recent pillars of demand growth – China and India – are wobbling. After more than a year with oil hovering around $50/bbl, the stimulus from cheaper fuel is fading. Economic worries in developing countries haven’t helped either. Unexpected gains in Europe have vanished, while momentum in the US has slowed dramatically.”
The gloomy picture was linked to faltering demand growth, which slumped from 1.4m bbl/day in the second quarter to a two-year low of just 800,000 bbl/day in the third. It prompted the IEA to lower its full-year average for crude demand growth to 1.3m bbl/day.
For 2017, it now expects demand growth to stand at 1.2m bbl/day as “underlying macroeconomic conditions” remain uncertain.
“As for the market’s return to balance – it looks like we may have to wait a while longer.”Pictured above: large pile of petroleum barrels. The IEA predicts the global crude oil overhang has no sight of abating
Source: Mint Images/REX/Shutterstock