How Much Will Oil Demand Grow In 2018?

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Includes: BNO, DBO, DNO, DTO, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO
by: ValueAnalyst

Summary

Oil demand is projected to grow a strong 1.5 mb/d in 2018, which will likely be revised upward in the coming months.

What will determine oil prices in 2018, however, is the upcoming oil demand growth, and not the past.

In this article, I discuss two factors that exert opposing pressure on global demand growth.

In the first week of 2018, I'd like to lay out the pieces that I will be watching in the upcoming year for future reference. First up:

Global Oil Demand Growth

The primary driver of oil demand is the global GDP growth, which has accelerated in 2017. According to the International Monetary Fund:

The global upswing in economic activity is strengthening, with global growth projected to rise to 3.6 percent in 2017 and 3.7 percent in 2018. Broad-based upward revisions in the euro area, Japan, emerging Asia, emerging Europe, and Russia more than offset downward revisions for the United States and the United Kingdom.

Even though the IMF has revised its growth expectations for the United States lower, most recent data shows that a close to 3% GDP growth rate is possible for 4Q17, which would represent an acceleration from previous years:

The strong ongoing global growth will bode well for oil demand growth in the upcoming year, but higher prices will not. In the last six months, oil prices have risen by 30 to 35 percent:

Chart Brent Crude Oil Spot Price data by YCharts

The graph above illustrates that oil prices are now at three-year highs. Because oil has an inelastic demand curve, it is unlikely that the global oil demand growth will significantly slowdown until higher prices run through the economy.

Before we combine the two factors, let's first see how global oil demand growth has trended in the last four years:

In the last four years, global oil demand has grown by 1.325 mb/d per year on average, and the IEA has recently projected that oil demand would grow by 1.5 mb/d in 2017, which represents an acceleration from previous years. Readers should keep in mind, however, that in none of the years represented above, the global growth rate was as high as expected for 2018.

On the flip side of the demand coin, I expect oil prices to continue to rise in the early part of 2018, and accelerate towards the middle of the year due to the summer driving season. If this scenario plays out, higher oil prices will likely hurt oil demand growth more than higher global growth rate will help.

Bottom Line

I expect oil demand growth to clock in at 1.3 to 1.4 mb/d in 2018, primarily due to higher oil prices, partly offset by the positive impact of quicker global growth projected for the upcoming year.

I expect oil demand growth to remain strong in the early part of 2018, but for the growth rate to decelerate towards the end of the year. I expect a more severe impact on oil demand in 2019.

Disclosure: I am/we are long TSLA, NE, ESV.

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.