But we are not done yet.
A third shock might well be in store: a collapse in world oil demand growth. And here we mean a collapse, not the 100,000 b/d downward revision from 1.4 to 1.3 mil b/d increment in 2016 consumption that the International Energy Agency flagged in its monthly report this week. The age-old perils of extrapolating oil demand growth based on backward-looking and incomplete data have been exacerbated this year by rising uncertainty over what the real Chinese oil demand is, especially given the divergence between its galloping crude imports and its lackluster refined products consumption, the latter only an approximation derived from a bunch of official data. And now we might be in for a fresh economic growth wobble, which does not bode well for consumption.
Chinese oil demand growth, the biggest driver of the world’s rising consumption for the past several years, came in under 1% for the first half of this year, by most accounts. So unless there is a surprise surge in the second half, for which we don’t see any supporting factors, the country is only adding about 100,000 b/d or less to its appetite this year. Indian consumption growth, even assuming a strong 7% on-year average increase for 2016, would only add about 300,000 b/d. With no other Asian countries contributing any big absolute numbers to oil demand, we would say the IEA’s demand growth projections for the region at around 900,000 b/d are still way too optimistic.
In the US, the world’s largest oil consumer and one that has passed on much more of crude’s slump to the pump than a lot of other countries, nationwide regular gasoline prices averaging around $2.1/gal (55 cents/liter) in Jan-Jul 2016 were the lowest in 14 years. And yet, gasoline demand over the period grew by just about 300,000 b/d, or 3.3% from a year ago to 9.43 mil b/d, according to the US Energy Information Administration’s weekly data.
KEEP AN EYE ON THE BOND BLUES
Add to this mix the possibility of central banks around the world starting to take the foot off the quantitative easing pedal, a fear prompted by the latest signs from the European Central Bank as well as the Bank of Japan that they may scale back their massive bond-buying programs. This hit the financial markets this week with the “bond blues,” a sell-off in global bonds that drove up sovereign debt yields and corporate borrowing costs, promising to inject volatility into the stocand currency markets in the coming weeks. The currencies of oil-exporting emerging nations have already been battered by weak oil prices. Investors becoming risk-averse amid doubts over central banks’ ability to stimulate growth and eying the prospects of a Fed rate hike could continue driving up the US dollar and weakening emerging market currencies, including those of the oil-importing nations that currently underpin demand growth, but could lose some of that appetite as oil becomes dearer in the local currencies.
The US dollar index, the value of the greenback relative to a basket of six major world currencies, settled at 95.312 Thursday, up from 95.027 a week ago. Consensus expectations for an interest rate hike at the US Federal Reserve’s policy meeting September 20-21 are low, but relatively high for December.
As OPEC noted in its monthly report this week, a sharp decline in oil and gas sector investments as well as lower output values has already negatively impacted global economic growth, which has not been compensated by the positive effects that might have been had from increased consumption. With fresh economic headwinds, that imbalance now risks becoming more pronounced.
A final word on the much-hyped OPEC/non-OPEC informal meeting in Algiers on the sidelines of the Sep 27-28 International Energy Forum. Even if the proposal has morphed from a “freeze” – all producers holding output steady at current levels – to voluntary caps on production to allow countries such as Nigeria, Libya and Iran to reach their full potential, as some reports suggested this week, it looks like a pie in the sky. First, voluntary production caps won’t change anything fundamentally in terms of mopping up excess supply. Second, compliance with any such agreement would be tricky, to say the least. Third, any boost in price from even a partial compliance could turn the resilient shale to a resurgent shale story, bumping up US output, which now has more than 1 million b/d of spare capacity, the difference between the April 2015 peak of 9.6 mil b/d and current production averaging under 8.5 mil b/d.