Slow Market Demand Impacts on Crude Oil Price

Highlights

  • Recent forecasts by IMF and IEA signals weakening oil market.
  • Sustained high oil prices in the last few months have  lead to mounting import bill which could erode future demand.
  • The fast growing renewable energy sectors and its increased efficiency which lead to better ROI and affordable source of energy.
  • US-China trade tensions may shave 0.5% from global GDP growth.
  • Erosion of demand could lead to greater price volatility.
  • Increase in import bill for emerging economies

Oil Prices Retreat Amid Crude Demand Concerns 

Dated Brent lost US$2.0/bbl to settled at US$75.84/bbl as of 30 October 2018, and West Texas Intermediate (WTI) decreased by US$0.8/bbl average US$66.2/bbl within the same period.

Trade wars, weakening emerging markets and currencies, and the strengthening US dollar began to overshadow earlier market fears of Saudi and the rest of OPEC+ inability to offset the loss of Iranian barrels and continuously falling production in Venezuela.

Source:

  1. Xinhua, OilPrice

Analyst Insights

Recent forecast by IMF and IEA signals weakening oil market

Both IMF and IEA have revised downward their forecast of global GDP growth and global oil demand for 2018 and 2019, respectively.

IMF projected global GDP to grow by 3.7% in both 2018 and 2019 in its latest October report, down 0.2% from its July forecast of 3.9% for both years.

Similarly, IEA revised downward its global oil demand growth estimates for both 2018 and 2019 by 100 kbpd in October as well. Global oil demand is expected to grow by 1.3 million bpd in 2018 to 99.2 million bpd, compared to 1.4 million bpd projected in September. For 2019, global oil demand is predicted to grow by 1.4 million bpd, lower than previous month forecast of 1.5 million bpd.

Emerging countries face higher import bill

Brent oil price have risen to US$78.9/bbl in September, 40% higher compared to US$56.1/bbl a year ago. The US dollar have also strengthened in real effective terms by about 6.5% since February this year, driven by tightening monetary policy and strong US economic growth. Higher oil prices, stronger US dollar and weakening local currencies in emerging economies have made the oil import bill for net importers such as India, Turkey and Indonesia significantly more expensive. India, which imports over 80% of its oil needs, saw its crude oil import bill ballooned 76% y-o-y to US$10.2 billion in July after Brent price  rose 53% to US$74.4/bbl.

US-China trade tensions could lead to oil demand erosion and oil price volatility

US and China trade spats could lead to reduced export volumes, lower consumer spending and weakened business investment resulting from the ongoing trade conflict. US GDP is expected to grow 2.9% this year before dropping to 2.5% next year. China is projected to grow by 6.6% in 2018 before falling to 6.2% in 2019. Extended US-China trade war could cut 0.5% of global GDP by 2020.

Erosion of demand could lead to greater price volatility

Lower demand resulting from slower global economic growth coupled with mixed signals from Saudi Arabia or OPEC+ concerning production plans and uncertainties on the extent of supply shortfall once Iran sanction takes effect, will continue to heighten oil price volatility.

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Categories: Current Issue, Oil & Gas

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