(Bloomberg Opinion) -- As I warned last week, oil demand growth is drying up and it’s not over yet. Two of the major oil agencies have just cut their forecasts for incremental demand this year, but they haven’t gone far enough.
The revisions to full-year oil demand growth by the International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA) were almost small enough to be shrugged off. The real worry is in the detail.
On Tuesday the EIA, part of the U.S. Department of Energy, cut its 2019 oil demand growth forecast to 1.01 million barrels a day. That was down by 60,000 barrels a day from the previous month’s view – a tiny revision in a 100-million barrel market. Then on Friday the Paris-based IEA cut its forecast to 1.08 million barrels a day from the 1.18 million it predicted in July. That, too, could be dismissed as another minor tweak.
But concentrating on those small revisions misses the point. Digging beneath the broad annual changes into the quarterly numbers paints a much more worrying picture. Estimates of incremental oil demand in the first half of the year had already been slashed well before last week’s reports were published. That process started as model-based forecasts began to be replaced with hard data.
The downward trend is becoming clearer even if there have been bumps along the way. The IEA made its first big revision to first quarter oil demand growth in May, following it a month later with a second reduction that took the figure down to just 250,00 barrels a day from the 1.16 million that it had been forecasting in January. That number has been revised up a little subsequently as more countries have reported demand numbers, but still stands at just 470,000 barrels a day, the smallest year-on-year growth since 2011. The reductions to second-quarter demand growth began in June and have seen estimates slashed to near 700,000 barrels a day by both the IEA and the EIA from about 1.6 million in January. For the period from January to May, for which the IEA has complete data for most of the world’s major oil consumers, demand grew at its slowest pace for the same period since the financial crash of 2008. So what about the third quarter, which is now almost half done? Here is where my alarm bells really start ringing.
Until last week, the two agencies were still forecasting robust demand growth of about 1.5 million barrels a day for the third quarter. Indeed, the IEA had increased its forecast for the third quarter in both June and July at the same time as it was slashing its estimates for the earlier periods. It cited a combination of “expected stronger economic growth in the OECD in the second half of 2019, as well as the fact oil prices remain lower than last year,” alongside the commissioning of several petrochemical plants in the second half of the year. It also noted that its view assumed “that the trade standoff between China and the US does not deteriorate.”
Those assumptions are no longer tenable. The U.S.-China standoff has deteriorated and it could get a lot worse before it gets better, depending how China responds to the latest tariff threats from Washington. Fears of a broader economic slowdown are also boosting the value of the dollar against currencies like the euro and the Chinese yuan as investors seek safe havens for their money. That is making oil more expensive in non-dollar economies, offsetting some of the impact of cheaper dollar-denominated crude.
Full-year demand growth forecasts of around 1 million barrels a day are being supported by increasingly positive outlooks for the fourth quarter. But with predictions for the third quarter also drifting down, it may not be long before the IEA and EIA start reducing those rosy numbers for the final three months of 2019.
That will leave OPEC and friends with a big problem. They have only just agreed to extend their current deal to cut output until the end of March. That decision was meant to show the group’s determination to shore up oil prices, but it already looks like falling well short of what’s needed.
Saudi Arabia says it will not tolerate a continued slide in prices, but it has few options to halt the slump. Its production is already set to fall in September, when it will supply customers with 700,000 fewer barrels a day of crude than they have asked for. It may soon have to drop to levels not seen since the kingdom was trying to prop up prices in 2013-14. That policy didn’t work so well for them. Oil prices still collapsed in the second half of 2014, even with robust demand growth.
Prices responded positively to the latest signs of Saudi resolve, but it will take more than words to prevent the gloom from settling again. Brent crude fell as low as $55.88 a barrel on Wednesday, wiping out most of the gains it had made this year. But the problem doesn’t lie with supply. More output cuts – even if they are shared among OPEC+ producers, which seems unlikely – will do nothing to stimulate oil demand. That will require President Donald Trump to complete some of those trade deals he keeps tweeting about.
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Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.
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