LONDON (ICIS)--Persistent low oil prices and global economic growth gaining momentum will cause crude demand in 2015 to rise by 1.6m bbl/day, the International Energy Agency (IEA) said on Wednesday.
The IEA’s new forecast for crude demand in 2015 represents an increase of 200,000 bbl/day compared to its last Oil Market Report published on 10 July.
"Oil's plunge below $50/bbl from triple digits a year ago has seen demand react more swiftly than supply. As a result, the world is now expected to use 1.6m bbl/day more fuel in 2015 than the previous year as economic growth consolidates and consumers burn more oil. That's the biggest growth spurt in five years and a dramatic uptick on a demand increase of just 700,000 bbl/day in 2014," the IEA said.
It added that “persistent macro-economic strength supports above-trend growth” of 1.4m bbl/day in 2016.
Global oil supply, meanwhile, fell in July by 600,000 bbl/day due to lower output from countries outside the Organisation of Petroleum Exporting Countries (OPEC), a trend the Paris-based agency expects to continue in 2015 and 2016 as non-OPEC oil companies cut capital expenditure (capex) as their profits are squeezed.
“As lower prices and spending cuts take a toll, non-OPEC supply growth is expected to slow sharply from a 2014 record of 2.4m bbl/day to 1.1m bbl/day this year and then contract by 200,000 bbl/day in 2016,” said the IEA.
Supply from OPEC countries also fell in July, albeit more moderately, by 15,000 bbl/day to 31.8m bbl/day as Saudi Arabia’s output eased, offsetting a rise in Iraq’s production as well as increased Iranian flows.
However, despite July’s fall in supply, a global surplus is expected to persist through 2015, keeping prices low with the IEA suggesting global inventories will pile up further. This overhang is being supported by the decision taken by OPEC’s main producers to maintain market sharealbeit within a low price environment.
“Muscular pumping from OPEC's top producers Saudi Arabia and Iraq has boosted the group's flows to 31.8m bbl/day - the highest in three years. Since the Riyadh-led OPEC decision last November to defend market share rather than price, output from the 12-member group has soared by 1.4m bbl/day and it looks as if there is no backing down,” said the IEA.
In addition, the agency said inventories in countries belonging to the Organisation for Economic Co-operation and Development (OECD) reached in June an all-time high of 2,916m bbls after rising counter-seasonally by 9.9m bbls. The surplus average levels widened in consequence to a record 210m bbls.
“Even with the slowdown in non-OPEC production and higher demand growth, a sizeable surplus remains. Our latest balances show that while the overhang will ease from a staggering 3m bbls/day in 2Q15, its highest since 1998, the projected oversupply persists through 1H16,” said the IEA.
“Assuming OPEC production continues at around 31.7m bbl/day (its recent three-month average) through 2016, 2H15 sees supply exceeding demand by 1.4m bbls/day, testing storage limits worldwide. The surplus drains down to about 850 kb/d in 2016, with 4Q16 marking the first quarter of a potential stock draw.”
The agency added that its outlook did not include potentially higher Iranian output in the case of sanctions being lifted after the country reached an agreement with western powers regarding the limitation of its nuclear programme.
This abundance in supply, together with the US dollar strengthening throughout 2015 has seencrude oil prices slump.
"By early August, global benchmarks had sunk around 25% below end June levels. At the time of writing, ICE Brent was trading at around $49/bbl while NYMEX WTI was at $43.30/bbl," the IEA said.
Global refinery runs, meanwhile, reached a record 80.6m bbls/day in July, 3.2m bbls/day higher than a year earlier, said the IEA, although “fissures” are showing as high distillate stocks have pushed cracks in Singapore down, prompting run cuts in Asia. In the US, soaring gasoline cracks in July helped support high margins and throughput.
“Against this backdrop, many participants in the oil industry have adopted a new mantra – ‘lower for longer’'. But how low and how long? While reduced capital spending will help rebalance the market in the short term, it will no doubt also lead to lower future supply growth. This will become increasingly sensitive if demand continues above-trend, as it has so far in 2015,” concluded the IEA.