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Tuesday, December 12, 2017

IEA forecasts further demand reductions as oil supply increases

The Paris-based International Energy Agency (IEA) reports that changes are taking place in the oil market - not just to demand, but also to the supply side and the refining industry. The economic environment is clearly paramount: just as the demand shock of 2004 shaped the oil market for the next three years, so too could the impending slowdown.

 

It has made further adjustments to the demand growth projections in this report, reflecting the changes for key countries published in the latest International Maritime Statistical Forum (IMF) forecasts. As a result, global oil demand in this report has been revised down by about 0.2 mbd in 2008, leaving global oil demand growth - which was projected at 2.2% last July - at 1.9%. Considering that a proportion of that demand growth represents a weather-related rebound in the Organisation for Economic Co-operation and Development (OECD) area, the underlying trend is even weaker.

 

Lower demand growth affects other sectors of the oil market, particularly the refining sector. Globally there have been minor downward revisions to transportation fuel demand projections, but the changes have been more significant in the Atlantic basin (compounded by faster-than expected ethanol supply growth) – hence the currently weak gasoline cracks. Low margins are forcing U.S. refiners to cut runs despite imminent seasonal maintenance, filling the gap with European imports. Ample European gasoline supplies (as drivers switch to diesel cars) are also highlighted by an exceptionally high price differential between Europe and Singapore.

 

Most negative for the tanker market is the reduced demand expected in North America, even if the reduction is only marginal.

 

 

The IEA says that the demand shock of 2004 was largely responsible for shaping the oil market we have today, but equally importantly, it was followed by three further years of strong growth. In a similar vein, an economic slowdown has the potential to change the landscape over the next few years, depending on how deep it is and how long it lasts. Although stocks have recovered slightly in January, they remain low, as does spare capacity.

 

The Organisation of Petroleum Exporting Countries (OPEC) is projected to increase crude oil capacity production by 1.795 mbd in 2008. There are 20 different projects in 10 different OPEC countries, of which the three biggest are 0.5 mbd and 0.2 mbd in Khursaniyah and Shaybah in Saudi Arabia and a 0.25 mbd project in Agbami in Nigeria. OPEC production was estimated to be 32.02 mbd in January 2008 compared to a sustainable production capacity of 35.04 mbd, i.e. a spare capacity of 3.02 mbd. Some 1.75 mbd of the spare capacity are in Saudi Arabia, 0.41 mbd in Nigeria and 0.26 mbd in the United Arab Emirates (UAE). The rest are 0.03 mbd to 0.15 mbd in five other OPEC countries.

 

The Former Soviet Union increased oil exports by 0.57 mbd in 2007 with 0.55 mbd of the increase being delivered through the Baku-Tbilisi-Ceyhan pipeline ((BTC). Exports from the Black Sea area were reduced by 0.04 mbd and exports from the Baltic Sea area increased by 0.05 mbd. There was a small reduction in Druzhba Pipeline exports and a small increase in "other exports" - which would be Sakhalin. The Former Soviet Union (FSU) is projected to increase oil production by 0.4 mbd in 2008.

 

Contact: Erik Ranheim