19/06/2019 – News / Oil & Gas / Economy / International Energy Agency / Global
IEA releases Oil Market Report: 2020 vision
World trade growth has fallen back to its slowest pace since the financial crisis ten years ago, and the consequences for oil demand are becoming apparent, says the International Energy Agency (IEA), which has just published its first oil & gas outlook for 2019.
The new study – ‘Oil Market Report: 2020 vision’ – is released at a time when volatility has returned to oil markets, following a dramatic sell-off in late-May leading Brent prices to fall from US$70/bbl to US$60/bbl.
Until recently, the focus has been on the supply side, with a familiar list of uncertainties – Iran, Venezuela, Libya, and the Vienna Agreement – lifting Brent prices above US$70/bbl in early-April and keeping them there until late-May. Nor have supply concerns gone away, notes the IEA: On 13th June, oil prices initially increased by four per cent on the news of the attacks on two tankers in the Gulf of Oman, before easing back slightly.
Now, however, the main focus is on oil demand, as economic sentiment weakens. In May, the OECD published an outlook for global GDP growth of 3.2 per cent in 2019 – lower than our previous assumption. World trade growth has fallen back to its slowest pace since the financial crisis a decade ago, according to data from the Netherlands Bureau of Economic Policy Analysis and various purchasing managers’ indices.
Demand slump in OECD countries results in lowest growth since Q1 2011
The consequences for oil demand are becoming apparent, observes the IEA. In Q1 2019, growth was only 0.3 mb/d (versus a very strong Q1 2018) – the lowest for any quarter since Q4 2011.
The main weakness was in OECD countries where demand fell by a significant 0.6 mb/d, spread across all regions. There were various factors: a warm winter in Japan, a slowdown in the petrochemicals industry in Europe, and tepid gasoline and diesel demand in the United States, with the worsening trade outlook a common theme across all regions.
In contrast, the non-OECD world saw demand rise by 0.9 mb/d, although recent data for China suggest that growth in April was a lacklustre 0.2 mb/d. In Q2 2019, the IEA noted global demand growth 0.1 mb/d lower than in last month’s Report.
Optimism for an improved economic picture
For now though, there is optimism that the latter part of this year and next year will see an improved economic picture. The OECD sees global GDP growth rebounding to 3.4 per cent in 2020, assuming that trade disputes are resolved and confidence rebuilds. This suggests that global oil demand growth will have scope to recover from 1.2mb/d in 2019 to 1.4mb/d in 2020, the IEA forecasts.
And meeting the expected demand growth is unlikely to be a problem, the Agency noted. Plentiful supply will be available from non-OPEC countries. The US will contribute 90 per cent of this year’s 1.9 mb/d increase in supply, and in 2020 non-OPEC growth will be significantly higher at 2.3 mb/d with US gains supported by important contributions from Brazil, Canada, and Norway. Later this month, Vienna Agreement oil ministers – faced with short-term uncertainty over the strength of demand and relentless supply growth from their competitors – are due to discuss the fate of their output deal.
Support from expected pick-up in refining activity
Ministers will note that OECD oil stocks remain at comfortable levels 16mb above the five-year average. However, they will also note that although in Q1 2019 weak demand helped create a surplus of 1.1 mb/d, in 2Q19 the market is in deficit by an estimated 0.4mb/d, with the backward-dated price structure reflecting tighter markets. This deficit is partly due to the fact that in May the Vienna Agreement countries cut output by 0.5mb/d in excess of their committed 1.2 mb/d. In Q3 2019, the market could receive further support from an expected pick-up in refining activity.
Recently, high levels of maintenance in the US and Europe, low runs in Japan and Korea, and fallout from the Druzhba pipeline contamination (Russia) contributed to weak growth in global refining throughput. This could be about to change: according to IEA estimates, crude runs in August could be about 4mb/d higher than in May. This might cause greater tightness in crude markets, particularly for sour barrels if the Vienna Agreement is extended and there is no change in the situations in Iran and Venezuela. Of course, much depends on the strength of oil demand later in the year.
Plenty of non-OPEC supply growth to meet future demand
A clear message from our first look at 2020 is that there is plenty of non-OPEC supply growth available to meet any likely level of demand, assuming no major geopolitical shock, and the OPEC countries are sitting on 3.2mb/d of spare capacity. This is welcome news for consumers and the wider health of the currently vulnerable global economy, remarked the IEA, as it will limit significant upward pressure on oil prices. However, the Agency was also keen to stress that this must be viewed against the needs of producers particularly with regard to investment in the new capacity that will be needed in the medium term.