Pouring cold water on yesterday's optimistic demand forecast projected by OPEC, which projected global crude demand growth to rise by 1.5mm b/d in 2018, this morning the International Energy Agency warned that the crude oil price rally could be short-lived because, contrary to OPEC's expectations, global oil demand will be weaker than expected this year and next. In its closely watched monthly oil report, the IEA cut its crude demand growth outlook by 100,000 barrels a day for 2017 and 2018, as the WSJ reported. The agency now expects demand to grow by 1.5 million barrels a day this year and 1.3 million barrels a day next year.
The IEA predicted that balances will likely show the crude market is oversupplied in Q4 2017 and the first half of 2018, with oil demand in 2017 at 97.7mmb/d, rising to 98.9 million in 2018. Meanwhile, non-OPEC Oil Supply is expected To rise by 700,000b/d In 2017 To 58.1mmb/d, and another 1.4 mmb/d in 2018 to 59.5mm b/d, led by shale output.
The IEA also noted that global oil inventories fell 63mm barrels In Q3, only second quarterly draw since 2014, with the call on OPEC crude seen at 32.6mmb/d in Q4, declining to 32.0mmb/d in Q1 2018.
However, "the highlight of the report was that they lowered their demand forecast," said Jens Pedersen, senior analyst at Danske Bank. The report also cautioned that "if the geopolitical concerns calm down, then prices could fall down again, so on the margin it’s a tad bearish."
The IEA noted that oil prices have risen roughly 20% since early September with Brent crude sustaining gains above $60 a barrel in recent weeks, on the back of supply disruptions and geopolitical tensions in the Middle East. But if those problems prove temporary, a “fresh look at the fundamentals” would likely show the “market balance in 2018 does not look as tight as some would like and there is not in fact a ‘new normal.’”
As noted above, the IEA’s findings stand in stark contrast to that of OPEC, which released its monthly oil report Monday. OPEC raised its forecasts for global oil demand for this year and next, touting increased market rebalancing and stability. The two reports come ahead of the highly anticipated OPEC meeting in Vienna on Nov. 30, during which the cartel and some other major producers are set to debate whether to extend an agreement to rein in production.
The IEA focused particularly on US supply, noting that growth in US oil output until 2025 will be the strongest seen by any country in the history of crude markets, making it the “undisputed” leader among global producers, per the FT. The IEA predicted that technological advances that have enabled production from US shale oilfields to thrive will lead to growth of 8m barrels a day between 2010 and 2025, surpassing expansion rates enjoyed by any other nation.
“The US will become the undisputed global oil and gas leader for decades to come,” said Fatih Birol, IEA executive director. The country is expected to account for 80 per cent of the increase in global supply over the same period. “The growth in production is unprecedented, exceeding all historical records, even Saudi Arabia after production from the mega Ghawar field or Soviet gas production from the super Siberian fields.”
US tight oil production, which includes crude, condensates and natural gas liquids (NGLs) will rise to 13m b/d by 2025, out of total US output of 16.9m b/d.
Additionally, while the IEA said that global oil supply had risen in October by 100,000 barrels a day to 97.5 million barrels a day, driven by non-OPEC production in the North Sea and Mexico, OPEC output fell by 80,000 barrels a day in October to 32.53 million barrels a day, as a result of lower production in Iraq, Algeria and Nigeria—the lowest level since May. The figure was roughly in line with OPEC’s own estimate of 32.59 million barrels a day.
Commercial petroleum stocks in the Organization for Economic Cooperation and Development—a group of industrialized, oil-consuming nations, including the U. S.—fell below 3 billion barrels in September, for the first time in two years, the IEA said.
The agency this week also released its annual World Energy Outlook, in which it said global oil demand would not peak before 2040, although demand growth should slow “considerably” after 2025 amid greater fuel efficiency and electrification.
IEA Executive Director Fatih Birol, who in recent months has been rather pessimistic on the oil outlook, said even as penetration of electric vehicles drags down oil demand for passenger vehicles, global oil demand should continue to be strong through 2040 for commercial trucks, planes, ships and petrochemicals. “It’s too early to write the obituary of oil,” Mr. Birol said.