Yesterday, we observed that in logical consequence to sharply higher interest rates, US consumer loan demand had slumped in recent weeks, despite increasingly easy credit conditions: an outcome which for many economists is a harbinger to an upcoming recession, as households hunker down and begin to deleverage.
Now, following a similar causal chain, this morning the International Energy Agency also cut forecasts for global oil demand growth in 2018 due to oil’s recent price surge, as the highest prices in three years put a brake on consumption. As a result, the agency trimmed its 2018 world demand growth projection by 40,000 barrels a day to 1.4 million a day, projecting total consumption at 99.2 million barrels a day, down from 99.3mmb/d, still higher than the 97.8mmbpd global oil demand in 2017.
“The recent jump in oil prices will take its toll,” said the Paris-based agency, which serves as an advisor to most major economies on energy policy. Crude has jumped 17% this year, trading near $78 a barrel in London on Wednesday, and approaching the stated Saudi target of $80/barrel at which point the Aramco IPO once again becomes feasible.
As one would expect, the demand forecast by the IEA – which is not a cartel of oil producers and is therefore less biased – differs greatly from the forecast by OPEC – which is a cartel of oil producers and therefore is programmed to see only the best possible outcome no matter how high the price. As shown in the chart below, whereas the IEA demand forecast topped out, that of OPEC sees nothing but blue skies ahead.
The IEA commented on the 16-month campaign by OPEC and its allies to slash a global oil glut, which the agency said had been finally successful, with inventories falling below their five-year average for the first time since 2014. Markets are set to tighten further as output sinks in the economic disaster that is Venezuela and the U.S. re-imposes sanctions on Iran.
And yet the resulting price rally, while giving financial relief to producers, appears to be backfiring: in addition to cutting its demand outlook, stronger prices also prompted the IEA to increase estimates for supply from OPEC’s rivals, particularly the U.S. Production outside the Organization of Petroleum Exporting Countries will grow by 1.87 million barrels a day this year, or 85,000 a day more than previously thought, Bloomberg reported.
But back to the demand forecast, the IEA said that while the global economy remains robust (if clearly topping over), oil prices have surged about 75% since last June, and “it would be extraordinary if such a large jump did not affect demand growth,” the IEA said. The “effect of higher prices should in particular become apparent in gasoline demand in the next few months,” it said, confirming what we noted last month, namely that much of the Trump tax cut effect will soon be wiped out due to higher gas prices, putting further pressure on the US economy.
Developing nations are especially sensitive to crude’s rally after many of them phased out fuel subsidies when prices were lower, the agency added.
For the immediate future, the biggest unknown for the oil market is the impact of U.S. sanctions on Iran, which are being reimposed after President Donald Trump abandoned an international nuclear accord with the country, the world’s fifth-largest oil exporter.
While it’s “too soon to say what will happen this time,” the agency said, Iran’s fellow OPEC members could fill the gap because their pact to restrain supply leaves them with spare production capacity.
To be sure, there is likely more than enough excess capacity within OPEC to pick up the slack for Iran. OPEC’s Gulf producers and Russia have about 1.3 million barrels a day of output idle, more than the 1.2 million barrels a day of Iranian exports that were lost when sanctions were previously imposed in 2012, the IEA calculated.
Although OPEC and its partners have resolved to curb supply until at the least the end of this year, they’ll meet next month to review their policy.
Furthermore, markets face other disruptions besides Iran, with Venezuela’s output plunging to the lowest since the 1950s as its economy unravels.
“The potential double supply shortfall represented by Iran and Venezuela could present a major challenge for producers to fend off sharp price rises and fill the gap,” the IEA said.
Could the Iran sanctions be the catalyst that causes the OPEC production cut deal to unravel? Find out in a few short seeks.