OIL MARKET REBALANCING
Global oil demand is set to rise by 1 million or even 1.5 million barrels per day (bpd) in 2015, according to a range of forecasters.
Coupled with a fall in shale output in the second half of the year, as the decline in the U.S. rig count takes effect, that should be enough to bring the oil market near to balance by early 2016.
Worldwide consumption will increase by a little over 1 million bpd in 2015, according to forecasts published this month by both the International Energy Agency and the U.S. Energy Information Administration (EIA).
Ian Taylor, chief executive of Vitol, the world's largest oil trader, has also predicted demand will grow by around 1 million bpd, at a conference hosted by the Financial Times.
Paul Reed, who heads oil trading for BP, put growth at up to 1.5 million bpd, according to the Financial Times ("BP, Vitol: oil demand will be stronger than forecast" Apr 22).
Consumption has increased by more than 1 million bpd in 11 of the last 20 years, according to the EIA, so growth of 1 million to 1.5 million bpd would not be exceptional.
Moreover, a 1 million bpd increment in demand would represent a much smaller percentage increase than it did 10 or 20 years ago.
Extra consumption of 1 million bpd would represent an increase of just 1.1 percent, a growth rate exceeded in 12 of the last 20 years.
In the last two decades, oil demand growth has only failed to reach this rate when the advanced economies were in recession and in the immediate aftermath of the Asian financial crisis.
In a normal economic expansion, oil consumption has almost invariably grown by at least 1 percent or 1 million bpd, sometimes much more.
Forecasts by IEA, EIA, Vitol and BP therefore appear realistic, provided the global economy does not fall into recession, something which appears unlikely at this point.
Oil consumption is inextricably linked to the demand for transportation. The transportation sector accounts for 60 percent of oil consumption worldwide, OPEC estimated in its 2014 World Oil Outlook.
In the United States, three-quarters of the oil consumed was used as fuel for cars, trucks, railroads, ships and aircraft in 2012.
The global aviation and shipping industries each consume more 5 million bpd of fuel moving people and goods around the world.
Private motorists and trucking firms in the United States consume more than 11 million bpd and the global figure for road transport is around 36 million bpd.
Relatively small shifts in the demand for freight and passenger transport can therefore have a large impact on oil demand.
In recent years, global transportation demand has been restrained, first by the sharp rise in fuel prices between 2004 and 2008 and then by the lingering effects of the recession in the advanced economies between 2008 and 2012.
Many individuals and businesses traveled less and focused on traveling using less fuel to reduce costs.
But the price of oil has halved since June 2004, thanks to the shale revolution, and the outlook for the global economy is of steady if not spectacular growth.
With these sources of restraint removed, global transport demand is set to grow strongly in 2015 and 2016, and with it the demand for fuel.
There are plenty of reasons to think that demand for both passenger and freight transport will grow strongly this year and next, provided oil prices remain low and the global economy avoids another slowdown.
World trade volumes will rise by 3.3 percent in 2015 and 4.0 percent in 2016, the World Trade Organization has predicted ("Modest trade recovery in 2015 and 2016 following three years of weak expansion" Apr 14).
This is below the long-term trend of 5 percent in growth in trade volumes per year since 1990, but it is still faster than the 2.8 percent achieved in 2014, when oil demand nonetheless increased by around 850,000 bpd.
In aviation, the number of passengers is set to increase by more than 6.5 percent from 2014 to 3.53 billion in 2015, according to the International Air Transport Association (IATA).
Airlines will also carry an extra 2.2 million tonnes of freight, an increase of more than 4 percent compared with 2014.
As a result, IATA has predicted airlines' fuel consumption will rise by the equivalent of 260,000 bpd compared with 2014.
At sea, fuel consumption could rise by the same amount, or even more, as freight volumes rise. Cheaper fuel prices are also encouraging an end to slow-steaming, which was introduced as an economy measure during the years of high prices, which will boost fuel demand even more.
On U.S. roads, traffic volumes are up by 3-5 percent compared with 12 months ago, according to statistics from the Federal Highway Administration and state tax collectors. If the increase in private motoring and freight activity is sustained, it could translate into an increase of 250,000 or even 500,000 bpd in gasoline and diesel consumption.
Just these three sources - shipping, airlines and U.S. roads - could easily account for between 750,000 bpd and 1 million bpd of extra oil demand in 2015.
If cheaper fuel stimulates private driving and road freight in other advanced economies, and transport demand continues to grow in emerging markets across Asia and Latin America, it is easy to see how total oil consumption could rise by 1 million bpd or even 1.5 million bpd this year.
In the first three months of 2015, U.S. crude oil stocks by an average of 1 million bpd and most analysts put the global supply-demand imbalance at around 1.5-2.0 million bpd.
With global demand set to rise by 1.0-1.5 million bpd this year and U.S. shale output set to fall by perhaps 150,000-300,000 bpd in the second half, it is possible to see a pathway for the oil market to return near to balance by early 2016.
Nonetheless, there are several potential obstacles to rebalancing. First and foremost is the potential rise in Iranian exports if sanctions are lifted. Iran could add an extra 500,000 to 1 million bpd of extra crude to global supplies within a fairly short space of time if and when sanctions are lifted.
A second source of risk to the rebalancing scenario would come if the expected drop in U.S. shale output fails to materialize. Domestic oil prices have already risen by more than 20 percent from their recent lows and may be nearing the level at which much of the industry could breakeven.
But subject to these risks, the oil market should return to balance by the end of 2015 or within the first half of 2016, provided oil prices remain relatively low and the global economy avoids another recession.
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