Energize Weekly, June 20, 2018
The International Energy Agency (IEA) has trimmed its forecast for the increase in world oil demand for 2018 to 1.4 million barrels a day as supply, economic and price uncertainties could still roil the global market.
“Rapidly rising prices in recent months have raised doubts about the strength of demand growth, and we have modestly downgraded our estimate for 2018,” the IEA said in its June Oil Market Report.
The 7 percent reduction from earlier forecasts would have global consumption at about 99.2 million barrels a day for 2018. While growth in the demand for oil was strong in the first quarter of 2018 and the start of the second quarter, the Paris-based agency said it expects a slowdown in the second half of the year, linked to higher prices.
Still, IEA said, “prices are unlikely to increase as sharply as they did from mid-2017 onwards and thus the dampening effect on demand will be reduced.”
Measures under consideration in Argentina, Brazil, Indonesia, Russia and Turkey to help consumers deal with higher energy prices could boost demand, as will some new petrochemical projects coming online this year, the agency said.
There are, however, “downside risks” that could further dampen demand, the IEA warned. These include “the possibility of higher prices, a weakening of economic confidence, trade protectionism and a potential further strengthening of the U.S. dollar.”
The agency singled out tensions over trade as the main uncertainty in the oil forecast. “The risks associated with escalating retaliations are not negligible. The outcome of the recent G7 meeting appears to be very negative,” IEA said.
One the supply side, the EIA revised upward its estimates of non-OPEC production by 2 million barrels a day in 2018 and another 1.7 million barrel a day increase in 2019.
“The United States shows by far the biggest gain (about 75 percent of the total across 2018 and 2019), but recently this expansion has not been without stress,” the IEA said.
U.S. production is facing infrastructure constraints, particularly in pipeline capacity that has made West Texas Intermediate Crude (WTI) about $10 a barrel more expensive than Brent Crude.
WTI ended 2017 $6 a barrel higher than Brent Crude, and the spread has been as low as $2 a barrel. “Takeaway capacity is lagging behind output growth” in the U.S. fields, IEA said.
“We think that in Texas by end-2019 there will be a net 575 kb/d [thousand barrels a day] of additional pipeline capacity beyond our earlier number, albeit with most of it coming on line in the second half of the year,” the market report said. “In the meantime, capacity will likely remain tight, but production will still be able to grow strongly.”
The IEA’s non-OPEC growth for 2019 includes a modest increase from Russia reflecting a possible contribution to compensate for lost production from Iran and Venezuela.
IEA did not make a forecast for Iranian and Venezuelan production, but a scenario it did indicated that output from the two countries could be 1.5 million barrels a day lower.
“To make up for the losses, we estimate that Middle East OPEC countries could increase production in fairly short order by about 1.1 mb/d [million barrels a day] and there could be more output from Russia on top of the increase already built into our 2019 non-OPEC supply numbers,” the IEA said.
Even with meeting the gap, the market will remain “finely balanced” and vulnerable to price rise if there are added market disruptions, the IEA warned.
