The global oil-demand growth forecast for 2017 depends on a bumper Q4
Either Q1-Q4 crude consumption will rise at its fastest pace since 2010, or the data are very wrong
The International Energy Agency's (IEA) latest monthly market report is a sobering read for anyone thinking the market was speeding towards supply-demand balance. OECD stocks rose again in April and are now 292m barrels above the five-year average. That metric is important: Saudi Arabia is using it to judge the effectiveness of Opec's cuts.
Production is obviously a culprit. The price rise that followed Opec's decision to start holding back supply last November put rockets under US supply. The Energy Information Administration, part of the US government, expects output from the country's major shale formations to reach 5.48m barrels a day in July, its highest-ever level. Globally, the IEA says output in May rose by 0.565m b/d-1.25m b/d more than in the same month of 2016. It was the biggest year-on-year rise since February 2016.
Ordinarily, this wouldn't look so bearish, because the IEA expects global oil demand to rise by 1.3m b/d this year and again by 1.4m b/d in 2018. As things stood in May, rising supply is not quite keeping up with the increasing global thirst for oil—so the deficit will gradually drain the inventory. It might not happen as quickly as Opec thinks (by the end of the first quarter of 2018), but the glut will recede.
But what if consumers don't perform as the IEA thinks they will later this year? The growth in supply is happening; the growth in demand is a projection—and the speed of the market's return to equilibrium depends on it being right.
The year got off to a bad start: consumption in the first quarter was ropey, at just 0.9m b/d higher than in Q1 2016. That means the quarter's demand was weaker than it was in 2014—when Q1 consumption increased by 1m b/d year-on-year and the full year's demand growth tallied 0.7m b/d.
The data for Q2 are not in yet (the quarter hasn't finished). But, despite the slew of negative forces the IEA cites—consumption weakness in Japan, South Korea, the UK, Turkey, Spain, France, China, Germany and the sharpest fall in US oil demand since the Q4 2015—the agency's forecast for this quarter's demand is year-on-year growth of 1.2m b/d. The factors that hurt the numbers in Q1 (like India's currency reform) are "likely to prove transitory", it believes.
We'll know soon enough how accurate that is—but if the sluggishness persists, then the IEA's 1.3m-b/d forecast for annual growth will be under threat. If so, the rebalancing will be ever further off.
As it stands, if the IEA's annual-growth forecast is to come good, the pick-up in demand between Q1 and Q4 this year must amount to 2.7m b/d—the fastest Q1-Q4 rise since 2010. That was a year when annual demand soared by 2.8m b/d, off the low base set by the global financial crisis in 2009, when demand dropped by 1.2m b/d.
In oil-demand terms, does 2017 feel like the recovery year of 2010?
In short, either Q1 2017 consumption was not as weak as the IEA thinks (and the agency might revise it upwards at some point) or the recovery in demand from that low point to Q4's seasonal high will be truly remarkable, on a par with the demand revival seen after the world's worst economic recession in decades.