Silver as an investment

Oil Slides After IEA Turns Pessimistic, Sees Oversupply Extending On “Dramatic Deceleration” In Crude Demand

One of the great oddities in oil price forecasts and analysis in the past year has been the fascination with the supply side of the oil market, which is perhaps understandable following the relentless chaos coming out of OPEC nations. However, as we have long contended, the true wildcard is the demand side, which has been deteriorating over the past 6 months, driven primarily by a slowdown in Chinese demand, coupled with a US peak driving season which was far less exciting than many had expected.

We were glad to see the IEA finally realizing just how important the demand side also was, when in its latest report released earlier today, the Paris-based organization revealed a much more pessimistic outlook on the state of the oil market, predicting that a sharp slowdown in global oil demand growth, coupled with ballooning inventories and rising supply means the crude market will be oversupplied into late 2017. The IEA had previously expected the market to show no surplus in the second half of 2016.

 “Our forecast in this month’s report suggests that this supply-demand dynamic may not change significantly in the coming months. As a result, supply will continue to outpace demand at least through the first half of next year,” the Paris-based adviser said in its monthly report. “As for the market’s return to balance — it looks like we may have to wait a while longer.”


The IEA trimmed projections for global oil demand next year by 200,000 barrels a day to 97.3 million a day. It reduced growth estimates for this year by 100,000 barrels a day to 1.3 million a day, citing a “dramatic deceleration in China and India” this quarter coupled with “vanishing growth” in developed economies.

“Recent pillars of demand growth — China and India — are wobbling,” said the IEA, which counsels 29 nations on energy policy. “The stimulus from cheaper fuel is fading. Refiners are clearly losing their appetite for more crude oil.”

The IEA also noted that global refinery runs are expected to grow at their slowest pace in at least a decade this year, which will curb appetite for crude oil, just as inventories across the OECD rose to a fresh record high of 3.111 billion barrels, the report said. “With our more pessimistic outlook for the second half of 2016 refining activity and revisions to crude supply, the expected draws in the third quarter of 2016 are now lower, while the build in the fourth quarter of 2016 is higher,” the IEA said.

More importantly, the IEA admitted that “global demand growth is slowing at a faster pace than the group initially predicted.” The IEA left its forecast for demand growth for 2017 unchanged from its prediction in June at 1.2 million barrels per day, but cut its forecast for 2016 consumption growth to 1.3 million bpd, from 1.4 million.

“The key demand change in this report is the erosion of 300,000 bpd from the third quarter of 2016’s global demand estimate, and the resulting removal of 100,000 bpd from the net 2016 forecast,” the IEA said.

Here are the details from the report as summarized by Bloomberg and Reuters:

  • IEA cuts global oil demand fcast by ~200k b/d in 2H 2016 and throughout 2017 amid “fading” stimulus from cheaper fuel and “economic worries in developing countries,” monthly report shows.
  • 3Q16 demand growth seen at 0.8m b/d, lowest in 2 years, vs 1.2m b/d in last month’s report
  • “Dramatic deceleration” in China, India demand growth; “Severity of the 3Q16 slowdown has surprised”
  • Chinese growth “all but disappeared” amid economic restructuring, heavy flooding, factory closures ahead of G20
  • “Complete absence” of y/y oil demand growth in 3Q16 China
  • Demand growth in 2016 “will struggle” to rise above 1.3m b/d vs >1.4m b/d seen in previous report
  • Product prices no longer falling now that crude “hovering” near $50/bbl
  • “Unexpected” gains in European oil demand earlier in year have “vanished”
  • IEA sees European oil demand down y/y in 3Q16 for 1st time in 18 months; slowdown in France, Austria, Finland, Italy
  • Partial rebound expected in 4Q16 as temporary factors end
  • India’s y/y demand growth slowed to 16-month low in July
  • Heavy monsoon rains, “stuttering” industrial activity led slowdown

* * *

Despite oil’s collapse and resulting investment cuts, global oil production is still expanding, although nowhere near the breakneck pace of 2015. High-cost non-Organisation of Petroleum Exporting Countries (OPEC) producers have been hit particularly hard.

However, the loss has been more than made up for by OPEC. Saudi Arabia and Iran have each raised oil output by over 1 million barrels a day since late 2014 when OPEC shifted strategy to defend market share rather than price.

As a result of the IEA report, WTI tumbled 2.5% and was trading just above $45/bbl, erasing virtually all of yesterday’s dovish Brainard “risk on” gains.