Hasan Jamali
Javier Blas is commodities editor at the Financial Times
Oil demand growth is weakening fast as global economic growth slows down, so why does Brent crude oil trade persistently above $100 a barrel? The answer lies on the supply side -- non-OPEC production growth is weakening fast too.
Back in January, the International Energy Agency, which publishes benchmark supply and demand forecasts, said that oil consumption would growth by 1.4 million barrels a day this year. But in its latest report, issued earlier this month, the Paris-based IEA has cut its forecast for demand growth to just 1 million b/d, a reduction of 400,000 b/d, due to the impact of slower economic growth in the U.S. and Europe on energy consumption.
Oil bears have taken the slowdown in demand growth as a signal that prices would soon drop soon. But the exclusive focus on consumption is -- as the bulls argue -- misleading.
Since the beginning of the year the IEA has also made significant revisions to its non-OPEC supply growth forecast. Back in January, it anticipated that output would growth by 600,000 b/d. But now it anticipates a rise of just 200,000 b/d, a reduction of 400,000 b/d.
The weak non-OPEC supply growth performance is due to multiple factors: a protracted glitch at the U.K.'s Buzzard offshore oil field, a heavier-than-expected maintenance spring and summer season in the North Sea, the impact of the civil war in Yemen, and other minor disruptions in Argentina, Canada, Malaysia, the U.S. Gulf of Mexico and Sudan.
The annual averages mask even more important quarterly trends.
Between January and March, oil demand grew by a hefty 2.2 million b/d, but non-OPEC supply only added 600,000 b/d. Between April and June, it was even worse: oil demand growth slowed to just 600,000 b/d, but non-OPEC production actually fell by 400,000 b/d in the same period. The large gap between demand growth and non-OPEC supply growth, together with the loss of Libyan oil output, tightened oil markets massively in the first half of the year. During the first six months, the IEA estimates that global oil demand was greater than supply by 500,000 b/d, forcing the world to draw down inventories.
In the current quarter, oil demand is growing, according to preliminary estimates, at a year-on-year rate of 800,000 b/d, while non-OPEC supply growth has stagnated at zero.
The supply-demand imbalance is about to correct itself, however, as the impact of plus-$100 a barrel oil prices hit consumption. The IEA is anticipating that during the fourth quarter of the year non-OPEC supply growth, at 600,000 b/d, would overtake demand growth, estimated at just 500,000 b/d. But as the IEA itself put it on its latest monthly report: "The potential for slightly easier market fundamentals in the months ahead needs to be viewed against a backdrop of an actual and pronounced tightening in the market evident since mid-2010."