Demand recovery — case not proven

Opec members held their output target at 30mn b/d when they met in Vienna last week. In the face of declared May production in the region of 1.8mn b/d higher than that, the admonishment to members to adhere to the “ceiling”, and the assertion that the 30mn b/d should be seen as an annual rather than a monthly target was token. But Saudi Arabia’s oil minister, Ali Naimi, insisted that the market is not just stabilising but improving for producers while the meeting’s closing statement said oversupply has abated and demand is rising, even if secretary-general Abdullah al-Badri conceded that the days of the $100 barrel may be over.

The monthly Opec and IEA market reports, published this week, indicate much stronger demand growth this year than in the dog days of 2014. Opec began this year much more optimistic than the IEA, forecasting 1.15mn b/d growth, a number it has only edged up to 1.19mn b/d this month. The consumer country watchdog has been running to catch up, today shifting its forecast up by a chunky 280,000 b/d, compared with last month, to 1.4mn b/d, meaning that it has lifted its growth forecast by almost 500,000 b/d since January, so that it now outstrips Opec’s expectation.

On the face of it, everything on the demand side is going swimmingly. The producer group report notes that March US oil demand growth was the highest since December 2013 and the first quarter as a whole was strong compared with the same period last year, with risks for the rest of this year on the upside. European demand was strong in the first four months of 2015, and Japan saw a solid year-on-year rise in April for the first time in more than year. April’s Indian consumption growth was “exceptional” and “Chinese data also remain solidly supported by gasoline and light distillates to fuel the ever-growing transportation sector and new expansions in the petrochemical sector”, Opec says. And the IEA says: “All four of the world’s largest oil consuming countries posted higher-than-expected and rising year-on-year deliveries in the first half of 2015”, even Europe has seen growth, and Russia is less of a laggard than expected.

But, if the IEA was slow to cotton on to the rate of demand growth taking place under its nose, it has been quick to advance some strong arguments for why the best may be behind us, with the peak of the demand growth cycle reached in the first quarter.

Yes, there is improved demand growth because the global economy is somewhat stronger. But where Opec sees oil demand firming as the year progresses, the IEA argues that a set of very temporary factors have been bolstering prices. Refining project delays amounting to 1.5mn b/d of capacity in non-OECD countries are a boon for European refiners but will be short-lived, as will operational issues at some US refineries. Early 2015 demand growth was boosted by weather that was colder in Europe and the US than a year earlier. And some of the demand growth probably resulted from the collapse in prices that have since staged a recovery which while only partial is nonetheless substantial.

Add to this bulging OECD inventories, stubbornly rising US production, uncertainty over how US unconventional output will respond to price signals, and Opec members’ own production profligacy and the contention that market stability, let alone strengthening is upon is, as the Scottish legal system allows the jury to determine, not proven.

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