Jadwa Investment (JI) reports that according to OPEC data, global demand in Q3 2014 increased by 1.4 million bpd, year on year, with 1.5 million bpd of increases from non-OECD countries and a drop of 0.1 million bpd in OECD countries.
Weak economic growth, especially in the EU and Japan continues as a drag on oil consumption among OECD countries, but an uplift in economic activity in the US and a rise in demand during the winter months will result in higher consumption during the final quarter of 2014. According to OPEC data, world oil demand is expected to grow by 1.3% in 2015, or 1.1 million bpd, supported by non-OECD rises, with OECD countries only seeing an increase in demand in the final quarter of 2015.
Among the OECD countries the US is the main source of demand growth. US economic growth prospects are increasingly buoyant, with preliminary GDP growth for Q2 2014 at 4.2%, year on year. Full year GDP growth is forecast to average 2.8%, year on year. Historically, US energy demand has followed GDP growth rates. AS GDP continues to grow in Q4 2014 and 2015, positive growth in energy consumption will occur too, according to JI.
Meanwhile, EU oil demand growth continues to be weak due to the faltering economy. In Q3 2014, economic results from two of the largest European economies, France and Germany, disappointed, even before any impact from sanctions imposed by Russia, over Ukraine, kicked in. Persistently low inflation also remains a problem with the European Central Bank (EBC) recently cutting interest rates to record lows and charging banks for deposits held with it.
Furthermore, the EU is continuing to see improvements in fuel economy standards which, together with economic fragility, will result in Q4 2014 and 2015 oil demand declines, year on year. Moreover the Russian-Ukrainian conflict continues to affect confidence in the EU economy, and a very real risk of escalation exists, especially in the form of further sanctions.
The combination of closures in refinery capacity and increased use of LNG in power generation saw Japanese crude oil imports decrease in Q3 2014. Ample supply of LNG, in part due to increased US shale gas production, has seen LNG spot prices average their lowest since Q1 2011. Added to this is the Japanese government led energy efficiency drive which is forcing domestic crude refiners to cut capacity, with approximately 0.1 million bpd targeted for the whole of 2014.
Looking further ahead into 2015, oil demand is set to continue trending downwards. The Japanese economy is being weighed down by a sales tax and weak export growth and, more pertinently, the government is also in the process of reactivation nuclear plants, with one reactor given the go ahead to reopen next year. Although public opinion is still against the restarts, the government is keen to push through further re-activations so to decrease the huge import costs associated with oil and gas reliance.
The latest economic indicators for China point to a moderate slowdown in growth in Q3 2014. Industrial production and retail sales slowed in July and imports dropped further in August. As a result, oil imports in Q3 2014 were down 19%, year on year. Domestically, the economy is being dragged down by housing correction, while externally, export demand is being constrained by weaker recovery in the global economy.
China’s ability to meet its forecasted annual GDP of 7.5% is partly contingent on the strength of overseas demand, and with only tepid growth in key export markets in the EI and a recent upturn in the US, the risk of slower economic growth and, in turn, oil demand, remains. Despite this, JI still expects oil demand growth to be above 3% for the whole of 2014 since year to date oil imports were up 7.4%, year on year, and government infrastructure projects, new refineries and oil stockpiling will help sustain demand over the final quarter of 2014. JI also expects to see similar levels of growth in 2015 as a steady pick up in the global economy helps to expand Chinese exports.
JI highlights that the standoff between Ukraine and Russia continues to add to downside risks on both the demand and supply side of the oil market. Both the US and EU has applied sanctions on Russia and this, in turn, has been countered by Russia’s own sanctions. Capital outflow from the private sector in Russia totaled US$ 75 billion in the first half of 2014, up from US$ 32 billion, year on year. Risks of a further fall in oil demand in 2014 and 2015 remain. The Russian economy is expected to show meagre growth in 2014, which could continue into 2015 if no political resolution with Ukraine is reached.
Indian oil demand will remain at approximately 2% for the next quarter with comparable growth in 2015 too, JI reports. Demand will be held up by continued expansion in the construction sector but remains open to downside risks through macroeconomic uncertainty relating to a large fiscal deficit, and capital outflows due to a lack of economic reform.
Saudi Arabia’s implied oil consumption averaged 2 million bpd in the fist half of 2014, up 37%, year on year. The sharp rise in oil demand is largely a result of the start up of the 0.4 million bpd Satorp refinery in Q4 2013, which has pushed up refinery intake levels since the beginning of the year, In Q3 2014, the higher use of oil for domestic generation of electricity pushed Saudi oil production to an average of 9.8 million bpd, compared to H1 2014 average of 9.7 million bpd. JI expects continued economic growth to sustain oil demand throughout the remainder of 2014, while the staggered start up of the 400 000 bpd Yasref refinery in late 2014 will also push up domestic oil demand.
Adapted from a report by Emma McAleavey.
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