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Time for Opec to spring back in action

Updated April 21, 2019

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IS crude demand destruction around the corner? If the emerging indicators are interpreted correctly, the answer seems, yes.

The crude market is on up, yet the global economy is not in the best of health. The International Monetary Fund (IMF) is now projecting that as far as the global economic growth is concerned this year would be the weakest since the financial crisis of 2009.

In its latest World Economic Outlook, the IMF has reduced both its estimate of global growth in 2018 and its forecast for 2019, which fell from 3.7 per cent to 3.3pc. In the meantime, the Organisation for Economic Coope­ration and Development (OECD) composite leading indicator is below its long-term average of 100 since July 2018. It is now on a downward slope, reaching 99.10 in February — the lowest level since 2009. A recession cannot be ruled out, most agree.

Crude market prices and global demand have an inverse relationship. When prices go high, demand gets weaker. With oil prices at around $70 a barrel and global economic growth slowing down, oil demand is bound to take a hit.

Oil markets are tightening, causing global demand to falter, the Paris based International Energy Agency (IEA), the OECD energy watchdog is now underlining. The gloom on the global economic horizon, from Europe to emerging markets, could take a toll on fuel consumption, the IEA is saying. As we move into the second quarter of 2019, the oil market is showing signs of tightening, yet in terms of demand outlook, the signals are mixed, the IEA reported in its recent Oil Market Report.

While the agency kept its estimates for 2019 global consumption growth unchanged, predicting an expansion of 1.4million barrels per day (bpd), or 1.4pc, it highlighted a number of dangers.

Consumption in developed nations fell in the fourth quarter for the first time since 2014. In addition, concerns persist over the trade dispute between the US and China, while, demand recovery in the Middle East remains “modest,” and in the meantime, weakness in European countries could be exacerbated if the UK’s exit from the European Union is “disorderly,” the IEA underlined.

Good old friend, the IEA Executive Director Fatih Birol in a press interview too underlined; oil prices above $70 a barrel is impeding demand growth. With the US taking over Russia and Saudi Arabia in crude output, the rising prices may not be a good omen for the oil producers in the longer run. The current oil prices are already a drag on global oil demand and threaten to soften demand growth forecasts further, Birol hence, emphasised. The ramp-up in oil price is weighing on crude demand in the US, China, and India, the biggest markets, he added.

In 2018 the US not only accounted for the highest growth in oil production but it [also] also provided the highest growth in consumption. This year, the US oil demand growth may not be as strong as last year, Birol pointed out.

The risk of a price impact on oil demand is exacerbated by broader signs of a global slowdown in economic growth with indicators in China pointing to the weakest growth in the last three decades, he added.

“China was responsible for half of global oil demand growth over the last 20 years. Therefore this (weaker growth) may have an effect...on oil demand prospects,” he added.

“The higher oil price environment, if they stay around this level, may also have an impact...(and) put some downward pressure on demand growth,” Birol told S&P Global Platts in an interview. “So it will not be a surprise if we are to revise our demand numbers (from 1.4pc) in the next edition of the oil market report if the (crude) prices remain at these levels.”

Supply risks caused by geopolitical uncertainties in countries such as Venezuela, Iran, Libya and Algeria were enough to make one “nervous,” Birol said. “Deve­lopments in these countries [have] implications [for] oil markets and these may well push prices up,” he said. The output cut by the Organisation of the Petroleum Exporting Countries (Opec) is also contributing to the price rise. All combined, this could result in demand destruction.

Opec is aware of it. In its recent report, the Opec is also pointing to a slowdown in demand growth. It has already lowered its estimate for global oil demand growth this year by 30,000 bpd to 1.21m bpd due to “slower-than-expected (global) economic activity.”

Rising oil prices are adversely impacting global crude demand. Producers’ could not remain oblivious to it, and, for too long. Measures could be in the pipeline. Opec could at least open its tap and cool down the markets and avoid demand destruction. All bets are on.

Published in Dawn, April 21st, 2019