Oil Demand - Surging Or Weak?

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Includes: AREX, BNO, DBO, DNO, DTO, DWTI, GS, LGCY, MEMP, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Daniel Jones

Summary

Oil prices have been on the rise in response to bullish reports involving not only supply but demand as well.

With Goldman Sachs and the EIA both anticipating strong demand moving forward, Mr. Market is certainly excited but not everyone agrees with these forecasts.

With OPEC and the IEA still anticipating weak demand, investors should have a firm understanding of where all players are standing before jumping in.

I am more bullish than OPEC and the IEA but it is important to be cognizant of the range of demand forecasted this year and next.

Oftentimes, when investors these days talk about the oil market and the rebalancing that's currently taking place, they tend to place their emphasis mainly on the supply side of the equation. I am just as guilty of this as anyone, perhaps even more so than others. However, in this piece, I decided that it would be a wise idea to look at the demand expectations provided by three major oil organizations as well as Goldman Sachs (NYSE:GS) in an attempt to show what kind of demand growth investor can expect moving forward and what it means for investors in the United States Oil ETF (NYSEARCA:USO) and oil-related companies like Memorial Production Partners (NASDAQ:MEMP), Approach Resources (NASDAQ:AREX), and Legacy Reserves (NASDAQ:LGCY).

EIA expects strong growth

Of the three major oil organizations I'm looking at the EIA (Energy Information Administration), a U.S. agency set up by the government to provide as much valuable information as possible about the energy markets, has the greatest expectations moving forward. According to the group, the oil situation is quickly rebalancing and they had to reduce their estimates of commercial inventories in the OECD nations by 50 million barrels last year thanks largely to growing demand.

The EIA expects that oil demand this year will grow by 1.43 million per day barrels globally. While this may not seem like a great deal, it's above the 1.36 million barrel per day growth seen in 2015. Furthermore, in 2017, the organization expects growth to be even higher, averaging 1.54 million barrels per day compared to 2016. Interestingly, this represents a meaningful turnaround from prior forecasts, when the EIA estimated that 2016 growth would average just 1.16 million barrels per day in 2016 and 1.33 million barrels per day in 2017.

There have really been two major contributors to their change in forecasts. The first relates to the fact that cheap oil prices have led to increased demand, including in the U.S. as more motor gasoline is being ordered. However, the second relates to changes in demand abroad due to economic growth. In addition to seeing strong demand growth in India this year, the EIA has revised up its oil consumption for China. Last year, the nation consumed 11.28 million barrels of oil per day, up from the EIA's prior estimate of 11.18 million barrels per day, and demand growth in the nation is expected to be about 400 thousand barrels per day compared to the prior forecast of 300 thousand barrels per day. This change alone accounts for an increase in demand of 200 thousand barrels per day.

Goldman Sachs is a little less bullish

In its latest discussion on the issue of the global oil picture, Goldman talked about how supply disruptions have placed the supply/demand imbalance into a deficit for now. However, they also stated that they believe demand will play a positive roll in the rebalancing process moving forward as well.

According to Goldman, oil demand this year is expected to grow by 1.41 million barrels per day. Should this come to fruition, it will be meaningfully higher than the 1.20 million barrels per day in growth they anticipated a month earlier and, like the EIA, will come on the back of strong demand, especially from China, India, and Russia. If they are accurate in the assumptions, both China and India will see increases in demand totaling 0.35 million barrels per day in 2016. However, unlike the EIA, the company thinks that 2017's picture will be less bullish, with demand forecasted to grow by 1.31 million barrels per day.

OPEC and the IEA

Overall, the picture according to the EIA and Goldman is certainly positive, especially when you consider demand growth this year. Absent a major economic downturn or completely stalled growth throughout Asia (both of which are certainly possible but uncertain according to economists), they are probably right in their assumptions. On the other hand, both OPEC and the IEA (International Energy Agency) happen to disagree with them on the issue.

According to OPEC, oil demand this year should increase by around 1.20 million barrels per day. This is in alignment with what both the EIA and Goldman estimated just a month or so ago but, unlike them, they believe the combination of low prices and potential growth in Asia won't do much for the rebalancing process. The IEA also has decided to stick with their demand growth forecast of 1.20 million barrels per day for 2016. The IEA's number has stayed consistent despite the fact that they admitted that oil demand growth so far this year has been 1.40 million barrels per day. Unfortunately, I could not identify any data with forecasts for 2017.

Takeaway

Based on the data provided, it seems there's a pretty wide range of demand growth expectations for oil moving forward. At the top, you have the EIA and Goldman, both of whom have only seen such high numbers after revising their outlook. Apparently unconvinced by the macroeconomic environment and the significance of prices on demand for oil and other petroleum products, both OPEC and the IEA are sticking with their numbers for now. While only time will tell who will be right, my own guess is that, after another month or two (assuming data continues to come in strong), both entities will revise their forecasts higher but, in the meantime, investors have a lot to consider about the disparities between these parties and the impact their different estimates have on the broader oil market.

Disclosure: I am/we are long MEMP, AREX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may end up buying shares of LGCY or its preferred units at any point in time.