Higher oil demand expected despite a feeling of anxiety

FUNDAMENTALS are crucial to the overall health, and the global crude balance is no exception.

Slowing demand and growing output are continuing to impact the medium term crude scenario. OPEC is aware of it. In its monthly report, OPEC raised the forecast for oil supply from non-member countries, hampering its efforts to clear the glut and support prices.

Outside producers would boost supply by 950,000 bpd this year, up from 580,000 bpd expected earlier. This is raising OPEC’s forecast for 2017 non-OPEC output by more than 60%. The new forecast is based largely on higher-than-expected output growth from US shale-oil producers and Canadian oil-sands operations. For the US alone, OPEC raised its outlook for production growth by 285,000 barrels a day to 820,000 a day compared with last year. It now estimates the US will produce 14.45 million barrels a day this year of total liquids, which includes crude and similar substances.

"US oil and gas companies have already stepped up activities in 2017," OPEC said in its monthly report. "US tight crude output is expected to rise rapidly and increase by 600,000 bpd in 2017," OPEC said, referring to shale.

Consequent to all this, the OPEC has cut the demand forecast for its crude in 2017 to 31.92 million bpd, down 300,000 bpd further, from the previous forecast and not far from its current output. And this is despite the fact that OPEC and its partners in the output cut are reporting higher compliance to their agreement. As per a Reuters calculation, OPEC has complied 111 percent with the agreement, up from the estimated 104 percent in March. Consequently, the targeted oil stocks in industrialized nations fell in March - yet - they are reportedly still 276 million barrels above the five-year average. Stocks thus continue to be a major issue in the overall global crude balance, today.

The International Energy Agency (IEA) also sees a slowing demand growth. As per the IEA, global oil demand growth will be 1.3 million bpd this year, lower than 1.6 million bpd seen in 2016 and the 2 million bpd recorded in 2015.

This is not good news for the producers’, endeavoring hard to bring about a balance in the overall scenario. “If you were to take the IEA’s oil report and look at estimates of what OPEC might do (at its next meeting) - it might roll over the existing levels - and assume no changes to the demand and supply outlook, you will find that as we move to the second half of the year it is likely that the surplus in demand and supply will grow,” said Neil Atkinson, head of oil analysis at the International Energy Agency emphasized last week.

The major issue, preventing a real balance, remains the surging shale output. The EIA, the statistical arm of the US Department of Energy, in its Short-term Energy Outlook is forecasting the US crude production to average 9.31 million barrels a day in 2017, up 1% from the previous forecast. Further, in 2018 the EIA is projecting the US output to touch 9.96 million barrels a day, up 0.6% from its previous forecast.

“Increased drilling rig activity is expected to boost to US crude oil production this year and next, with forecast production in 2018 averaging 10 million bpd,” said Howard Gruenspecht, the EIA’s acting administrator, in a statement. The EIA has raised its 2018 crude-production estimate by roughly 6.5% since its initial forecast to 9.30 million bpd.

Investment banker Morgan Stanley also doesn’t appear very positive about the mid-long term crude outlook.

“Our base case expectations for 2018 is a balanced market with stable prices around end-2017 levels,” Martijn Rats, equity analyst at Morgan Stanley, wrote last week. “Yet the risks to that outlook are becoming skewed to the downside,” he noted.

The number of US rigs actively drilling for oil has made its “strongest recovery of the last 30 years,” Rats said. It has increased by 7.3 rigs a week over the last 52 weeks and “as a rule of thumb, an increase in the rig count of 10 units boosts production by 40 [thousand barrels a day] a year later,” he said. So with about 390 rigs added since the trough in May 2016, the US is “set up for a strong supply growth next year” that could exceed 1 million barrels a day.

In the note, Rats pointed out that the “US rig count recovery has recently overtaken even the stellar rebound” the market saw after the 2008/2009 downturn, “which was supported by oil prices rallying from $45 to $85/bbl within a year.”

The world's biggest independent oil trader, the Vitol Group, is also now underlining; demand isn’t expanding as much as expected, and US shale output is growing faster than forecast, Bloomberg reported. As a logical outcome, that’s increasing the burden on the major global producers, who need to stick to their pledges to cut supply, so as to keep prices from falling, said Kho Hui Meng, the head of the company’s Asian arm.

But the biggest variable is demand, and that is not enough: “What we need is real demand growth, faster demand growth,” Kho, the president of Vitol Asia Pte., said in an interview in Kuala Lumpur. “Growth is there, but not fast enough.”

The problem in a nutshell: originally, oil consumption, or demand, was forecast to expand this year by about 1.3 million barrels a day, growth has been limited to about 800,000 barrels a day so far in 2017, Vitol's Kho said, adding that US output had grown 400,000-500,000 barrels a day more than expected. “If demand goes back to where it should, where it’s forecast, then it’ll help, but my gut feel tells me it is still a bit long,” he said.

“The oil market is looking for growth but there’s no growth,” Kho added. And while US gasoline consumption is expected to hit its seasonal summer peak soon, demand growth “is not there yet,” he said.

“I am still watching the US summer gasoline demand,” Kho said. “OPEC has said it will try and extend its output cuts beyond June. So if that happens, and the discipline is good, and if the US lack of growth in demand changes in summer, then we may see oil go back to the low $50s, but the prevailing mood today is not.”

Oil producers seem banking on this. Saudi Arabia expects 2017 global consumption to grow at a rate close to that of 2016, Energy Minister Khalid Al-Falih emphasized last week. “We look for China’s oil demand growth to match last year’s, on the back of a robust transport sector,” he said in Kuala Lumpur. Some others are chipping in too. Sanford C. Bernstein & Co. also doesn’t appear concerned. Growth in the nation’s car fleet will support gasoline demand, with increasing truck sales and air travel also helping fuel consumption, it said in a report dated May 9. Falih has thus a point.

Yet, a number of ifs continue to haunt the oil markets today, one needs to concede now.