Musings: World Awash in Oil; Demand Lacking Says IEA
On Friday the International Energy Agency (IEA) cut its forecast for global oil demand by one million barrels per day (b/d) to 83.4 million b/d. That means the world will be using approximately 2.4 million b/d less than in 2008, or roughly a 3% decline from a year ago. This matches the first year decline experienced during the 1979-1983 period, but the IEA does not expect this industry downturn to last four years like the earlier one. The downward demand revision was made as the IEA used sharply reduced economic growth forecasts to project oil consumption. Much of the demand reduction is due to weaker oil consumption expected in developed economies such as the United States, but demand is falling in developing economies, also.
The IEA is now anticipating China's oil demand to shift from a small increase to about a 1% decline, or roughly an 80,000 b/d decline from its prior consumption forecast. The IEA pointed out that China's oil consumption fell about 6.9% in January-February from last year. China's news last Friday that its crude oil imports hit a one-year record high, suggesting better consumption for March was not available at the time the IEA made its revised forecast. If the IEA's projection for an oil demand decline in China proves accurate, it will mark the country's first annual decline in 19 years.
We found the chart of the growth rate in China's construction and its implied steel demand interesting when considered against the country's oil demand. What one sees is that in the first years of the period, 2000-2004, construction and steel demand growth was quite high, peaking in early 2004 at close to a 40% annual growth rate. In the following four years, the growth rate was considerably less than in the earlier period with the brief exception of the pre-Olympics period in 2007 and 2008. Construction demand fell steadily throughout most of 2008 until demand went negative in the last half of the year. Demand has rebounded in early 2009, but clearly the IEA doesn't believe this is a measure of healthy future oil demand.
The annual growth in China's oil demand follows the pattern of growth for the country's construction and steel demand. In the early years of the period, annual oil demand growth was noticeably stronger than in the recent years.
Global oil demand remains the key to oil prices in 2009. Falling oil production will become a greater factor in the supply/demand balance as we move through 2009 and into 2010. OPEC's continued discipline in holding its output to the cartel's reduced December production quotas will be important, but with surplus capacity of roughly 5.5 million b/d out of total global demand of 83.4 million b/d, or 6.6% of the total, the world is not very far out of balance. The IEA says it expects non-OPEC supply to fall by 320,000 b/d in 2009. Based on the report released Friday by the Alaska Department of Revenue, North Slope production will fall by 5% in the next fiscal year starting in June, and the drop would represent about 10% of the IEA's forecasted fall in non-OPEC supplies. But possibly more important is the IEA's identification of about one million b/d of gross pumping capacity of new supply that would have come into production in 2009-2010 that has been either delayed or canceled.
We believe there is sufficient uncertainty about a number of demand and supply drivers that one has to have a low level of confidence in forecasting the direction of the global oil market over the next five to ten years. While many people will focus on the supply challenges facing the petroleum industry, we remain convinced that understanding demand dynamics may be the most helpful in charting the future course for the oil markets. We are only confident in knowing that whatever we forecast, it will most likely be wrong. Hopefully we can at least get the direction right.
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