Global Oil Demand Growth Will Slow Significantly In 2017

Summary

• The market has ignored global oil demand as global oil supply continues to dominate headlines.
• Current oil demand forecasts for 2017 is too high and does not take into account the strong dollar's effect on global retail prices.
• We expect oil demand growth to be around 1mmbd in 2017, around 400,000bpd lower than current forecasts.
• Any reduction in oil demand will make OPEC's job of rebalancing the oil market even harder than it currently is.

Over the last few months, the oil market has remained fixated on global oil supply. There have been several debates on OPEC vs Shale and the duration of OPEC production cuts.

However, global oil demand continues to receive very little attention despite it being the other half of global oil balances. Despite stable global GDP growth, we have seen oil demand growth flatlined as the world economy becomes less oil intensive due to efficiency improvements and pollution concerns in the developing world.

Source: EIA Short Term Energy Outlook

The consensus for 2017 oil demand from the 3 below agencies is at 1.36MMBD which is around 1.4% of global oil demand. Oil demand growth has been very stable since 2012 growing between 1.3-1.6% according to EIA. However, with the strong dollar, we might see a sharp reduction in the global oil demand growth which can make OPEC's job of rebalancing the oil market even harder. The current consensus for 2017 oil demand growth so far is:

IEA - 1.4MMBD

EIA - 1.51MMBD

OPEC - 1.19MMBD

The dollar index touched a 14 year high recently and is still trading near those levels despite the recent drop. The strong dollar is putting significant pressure on retail prices paid by the consumer especially in the developing economies. We have looked at gasoline and diesel prices for 15 countries that contribute to around 50% of global oil demand. In the last 6 months, most of these countries have faced a significant increase in gasoline and diesel prices.

* Europe 5 = Germany, UK, France, Italy and Spain.

Source: IEA

Amongst the 15 countries that contribute to 50% of oil demand, the website globalpetrolprices.com track gasoline and diesel prices for all these countries apart from Saudi Arabia and Iran.

Source: globalpetrolprices.com

For the above 13 countries, on average they have seen retail gasoline and diesel prices jump by 10% and 13% respectively. For the USA, which has no currency impact the % price gain was 7% and 9% respectively. It's not just currency movements and oil price increases that are behind this increase in retail prices.

Source: IEA

Countries like India have phased out fuel subsidies in gasoline and diesel during the low oil prices in 2015-16 and their prices now reflect the true market prices. Thus, IEA has reduced oil demand growth for India in 2017 but we think that is still too optimistic and is vulnerable to lower demand growth. In addition, the effect of currency demonetization which took place in late 2016 is most likely to lower Indian oil demand this year. It is still very early days to assess the true impact of removing 86% of currency notes in circulation. However, it will most likely make a big dent in Indian oil demand as several businesses had reduced operations during the transition between the new and old currency notes.

In other countries like China, pollution concerns have substantially increased. Though the electric car market share in China is still very small, it will continue to eat into oil demand. India and China contributed to 41% of 2016 oil demand growth and IEA is expecting their market share to increase to 42% of global oil demand growth. We find IEA's forecasts very optimistic and we expect demand growth on the lower end for both countries.

Countries like Japan and the 5 biggest European countries, Mexico and Canada are expected to have negative demand growth in 2017. The recent increase in retail prices can cause further negative growth in 2017.

Russia showed a modest growth in 2016 and is expected to grow in 2017 as well. However, the country continues to get affected by the ongoing recession due to the low oil prices which can lead to negative oil demand growth. Similarly, in Brazil and Mexico, the 2017 demand growth is already expected to be negative but the double digit % growth in prices in the last 6 months can steepen this drop.

Caveat on global oil demand

We realize gasoline and Diesel demand can be fairly price inelastic as it's a necessity for most people. However, since we didn't see the surge in oil demand in 2015 and 2016 due to low oil prices, any increases in end user prices is likely to lower oil demand than current oil demand projections.

Conclusion

The strong dollar will significantly impact oil demand and the current consensus for oil demand growth is still too high. We expect oil demand to grow by 1mmbd instead of the expected 1.4mmbd by the IEA. Countries like India and China won't match the 2016 expectations due to higher retail prices, currency demonetization and pollution concerns. The reduced oil demand will make life harder for OPEC and delay the global oil rebalancing process and reduce the inventory overhang at a slower pace.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Comments

[Viking75]

I wonder what Oil unhedged thinks of his article written, 4 month ago. The USD has never been weaker in years and demand growth is being revised higher almoste every day.

[User 276302]

tell me about it, uup is about to challenge 23.96 support. punch a hole and then cliff diving.

[ValueAnalyst]

I just hope that Oil Unhedged is hedged.

[User 276302]

seems like oil consumption in asia (china and india) is very important to oil price.

[Viking75]

Thanks. I am sure some publicly asked them the questions though. They can't deny the facts.

[OILytics]

Hello ValueAnalyst,
IEA today lowered their 2017 oil demand growth by 100KBD to 1.3MMBD as they see lower demand growth from India/China. It's only April, expect more downward revisions in the coming months.

http://bit.ly/1wYi1Bq

[ValueAnalyst]

IEA did not lower its estimate by 100kbd. It revised it down by 40kbd, but people like yourself who pay zero attention to details hopelessly fall prey to IEA's frequent rounding games.

Keep an eye on 4Q16 and 2016 estimates when the tables become public in two weeks. I wouldn't be surprised if their 2017 estimate actually went UP despite the slight downward revision in the change from 2016 to 2017.

[ValueAnalyst]

Also - read this:

http://on.wsj.com/2p9Vfse

[ValueAnalyst]

As predicted, I am now told that 2016 demand estimate was revised up by 20kbd.

So your 100kbd revision all of a sudden became 20kbd.

Pay attention to details.

[OILytics]

We have had low oil prices since 2H 2014 and we haven't seen a big surge in global demand. The strong dollar is just one aspect which will negatively affect oil demand in some countries. Phasing out of fuel subsidies in some developing countries will lower their demand growth numbers compared to previous years.

[ValueAnalyst]

are you kidding? global oil demand surged +2.7 mbd from 3Q14 to 3Q15. The increase slowed down, but still remained healthy in 2016, due primarily to very severe YoY "tough comparison". I expect demand growth to pick up again in 2017; not to the 2+ mbd range, but close.

Here's the data for your reference: http://bit.ly/2iXu40g

[OILytics]

Thank you for reading my article. Even if we do get stronger GDP growth numbers, the oil intensity of global GDP growth is reducing as countries become more energy efficient. However, it's difficult to know how much of the increase in oil consumption due to global GDP growth will be offset by improved efficiencies.

[ValueAnalyst]

It's not the "global GDP growth" I am talking about, it is the "increase in global GDP growth" which can catch oil analysts off guard.

It seems that your reliance on yearly averages is misleading your analysis. For example, IEA significantly revised its global oil demand in 4Q16 over the last three months. It is now estimated that oil demand grew by an astonishing 2.2 mbd from 4Q15 to 4Q16, and I expect this to be revised higher even further in the next two months to +2.5 mbd. (source: http://bit.ly/2iXu40g ) And this happened in 2016, when global GDP growth was still muted. 2017 will be different.

Per my models, I expect anonther +2.0 mbd increase in 2017, driving global demand to exceed 100.0 mbd in 4Q17. Watch the headlines then...

[east_reader]

I don't agree the logic of the article either.
Strong dollar could affect the demand in some degree, however with the certain GDP growth, the key factor affecting demand is price instead of strong dollar. Low price will definitely increase the overall demand.

[OILytics]

Hi ValueAnalyst,
If you look at Q4'16 vs Q4'15, then some of the big y-o-y changes can be due to weather anomalies. A cold winter can skew these numbers. A yearly average smoothes out the global demand numbers and reduces the weather component.

[ValueAnalyst]

Thank you for looking at the supply/demand balance from a different perspective.

Having said that, however, I disagree with your analysis. I expect oil demand to surprise to the upside in 2017.

Specifically, if strong dollar were to negatively affect oil demand growth, this would first show up in global GDP growth projections, which are projected to increase in 2017 and 2018 vs. 2016 and prior years. This is expected as global growth has been slow in the last several years and the world is now moving onto the late-expansion stage of the business cycle.

"Global GDP growth is projected to pick up modestly to around 3½ per cent in 2018, from just under 3% in 2016, boosted by fiscal initiatives in the major economies."

http://tinyurl.com/d7s...

[john.fAIrplay]

If current trends of increasing economic growth in various places around the world stall or reverse, it's possible oil demand growth could stall as well. Otherwise, current demand forecasts may be too low.

[Viking75]

strong dollar??

[OILytics]

Yes, despite the recent drop the USD index still trades near multi-year highs.

http://tinyurl.com/l6p...