A decline in global oil demand has been blamed as one of the major reasons for the sharp fall in oil prices since June 2014. However, recent months have seen a steady acceleration in global oil demand growth, attributable to additional economic growth, cold winter weather conditions in Europe, and lower prices.
In its most recent monthly Oil Market Report, the International Energy Agency made notable upward revisions to global demand growth. The estimate of year-over-year global demand growth was revised up to 1.6 million b/d for this year’s first half compared with 1.2 million b/d in last month’s OMR.
According to the latest data from IEA, oil demand growth in second-quarter 2014 fell to a 5-year low of 200,000 b/d. Three quarters later, growth has surged to a 4-year high of 1.7 million b/d in this year’s first quarter.
OECD, non-OECD demand
"The biggest change in oil markets recently, at least from a demand perspective, has been the evolution of [Organization for Economic Cooperation and Development] demand from a long-declining, seemingly entrenched trend to a rising one," IEA said.
In OECD Europe, estimated demand for this year’s first quarter was up 4.4% on the year earlier due to a combination of colder-than-year-earlier winter weather, lower retail product prices, and macroeconomic gains. In this year’s first quarter, Euro heating degree days-the number of degrees that a day’s average temperature is deemed as requiring heating-were up 15% from the same period last year.
Although the sharp uptick in European gasoline and diesel is likely attributable to both colder climates and lower prices, "it is only really in the US where the price effect has appeared to play a greater role than previously forecast," IEA said.
Unlike in Europe where taxes on motor fuels are among the highest in the world, US retail fuel prices are not heavily taxed. Also, a strengthening US dollar doesn’t impair the impact of lower crude prices. Hence, the spillover effect of low crude prices on private consumption has been most significant in US.
Tracking closely to crude prices, US gasoline prices fell by one-third between June and December 2014, while the equivalent domestic currency gasoline price fell by just 13% in Germany, 10% in the UK, and 8% in Japan.
As a response to low prices, US oil demand has posted a surprisingly robust uptick, led by the traditionally more price-responsive gasoline and jet-kerosene segments. In this year’s first 3 months, with West Texas Intermediate fetching below $50/bbl, US total oil demand rose 370,000 b/d year-on-year, accounting for a third of the world oil demand gain during that quarter.
In contrast to the dramatically accelerating OECD demand, non-OECD demand growth has eased, largely due to more modest Chinese growth and slower gains and contractions in many net oil-exporting economies, according to IEA. However, non-OECD countries maintain the most rapid demand gains.
In Asia and Africa, some countries have also taken advantage of lower crude prices to abolish fuel subsidies, dampening the effect of low crude prices on private consumption.
This year’s second half
IEA forecasts OECD oil demand growth to decelerate through yearend, as both lower price supports and additional winter heating demand fall out of the outlook.
After bottoming out in January, crude oil prices rose by about one-third by May. And WTI futures contracts for September delivery traded during the 5-day period ending June 4 averaged $60/bbl.
"Demand growth, of course, has the potential to exceed the projections. If, for example, economic growth came in ahead of current expectations, and/or further price declines were seen, and/or exceptionally cold 2015 fourth quarter winter weather struck, then additional demand growth would likely emerge, and vice-versa," IEA said.
