The global oil demand must rise faster to absorb OPEC+'s hike

According to analysts, data and industry sources, the global oil demand growth must accelerate in the coming months, or else, the market may struggle to absorb a planned increase in oil production by OPEC+ starting in October. The United States and China, the two largest oil consumers in the world, failed to meet expectations for the growth of oil demand during the first seven-month period of the year. This was even before renewed fears about a U.S. economic recession led to a sell-off of global stocks and bonds this week.

Oil demand will probably slow down if the economy continues to slow. Analysts said that OPEC+ will have to either delay plans to pump out more oil or accept lower price for increased supply.

Gary Ross, CEO at Black Gold Investors, a veteran OPEC watcher, said: "Under current circumstances, there is a significant risk of recession. It's unlikely OPEC+ will move forward with planned increases for October."

Oil prices have fallen below $80 a barrel in August, which is less than what most members of OPEC+ (Organisation of Petroleum Exporting Countries) and their allies, such as Russia, require to balance their budgets.

Neil Atkinson is an independent analyst, who worked previously at the International Energy Agency. He cited concerns about China and the U.S. economy.

He said that it was difficult to imagine how prices could rise significantly if the demand is lower than expected. He also predicted that OPEC+ would pause its production increase. China's crude oil imports for the first seven month of 2024 totaled 10.89 million barrels a day, a 2.4% drop on last year, according to official data released on Wednesday. China's falling diesel consumption, due to the growing use of LNG powered trucks, has a negative impact on domestic fuel demand. According to government estimates, the United States' oil consumption has increased by 220,000 barrels per day (bpd) over the past year, to an average of 20,25 million bpd. The government's forecast for 2024 of 20.5 millions bpd will require a rapid increase in demand. It is hard to tell if global demand will reach the levels needed to absorb extra supplies this year due to the wide range of measurements used by the most respected oil analysts in the world, OPEC and IEA.

Data on oil consumption is often delayed and revised. Forecasters can only include their best estimates when calculating demand.

OPEC estimates that global demand will grow by 2.15 million bpd during the first half 2024. The IEA puts it at 735,000 bpd. The IEA provides energy policy advice to industrialised countries.

OPEC's estimates of demand growth for the first half of the year are little different from the ones made at the beginning of the calendar year. The IEA's estimate of demand growth for the first half has been reduced from its January forecast of 1.19 million bpd.

The IEA estimates that China's consumption fell in the second quarter while OPEC estimates a rise of over 800,000 bpd. China is a major reason for the differences in the outlooks for both the full year and the first half.

If OPEC's estimates of demand in the first half were accurate, global growth would have to be accelerated a bit in the second. If the IEA's estimates are correct, then demand will need to increase rapidly.

It is the second half of the year that has the highest oil consumption, due to the fact that global economic growth has increased demand for oil and also because of the high driving season and the Northern Hemisphere's harvest.

Calculations show that for the demand to reach OPEC's prediction of a full year, it must accelerate to an average 2.30 million bpd during the second half. The IEA full-year forecast requires a demand growth of 1.22 million bpd during the second half.

Next week, OPEC and IEA will update their forecasts of demand.

OPEC+ SUPPLY INCREASE OPEC+ confirmed last week its plan to increase production starting in October, with the caveat it could be paused and reversed if necessary.

The rise is based on the demand exceeding OPEC's projection, which would lead to a greater need for oil by the group of producers and their allies. OPEC+ produces more than 40% the world's crude.

If OPEC's prediction of demand is realized, it is predicted that the demand for crude oil from OPEC+ will reach 43.9 millions bpd by the end of the fourth quarter. This would be up from the production level in June which was 40.8 million bpd, theoretically allowing for additional output.

OPEC+ has a month left to decide if it will release oil in October. In the weeks to come, the group plans to study the data on the oil markets, according to a source within the group. Amin Nasser, CEO of Saudi Aramco, said that he expects growth between 1.6 and 2 million barrels per day in the second half.

According to two OPEC sources, it is unclear if the demand will rise as quickly as required to meet OPEC’s forecast for the third quarter. OPEC declined to comment on a request.

The US DEMAND is not clear

According to the IEA, a slower economic growth in China and a shift toward electric vehicles has changed the paradigm of the second-largest country in the world. China's economy has been driving global oil consumption for many years. OPEC sees strong growth persisting.

Early indications from data intelligence company Kpler of China's crude imports for August point to a slight rebound from July. Two traders who deal with China's purchases West African crude oil said that the demand for August loading oil was soft.

According to the International Air Transport Association (IATA), global jet demand this year is expected to exceed 2019 levels. However, IATA stated in June that travel to Asia was still subdued, especially in China.

Sources from oil trading companies said that jet demand in China and China were the two main factors driving demand growth. "Chinese demand was not great, and jet demand in Europe is decent but still hasn't fully recovered from the pandemic."

The United States is the world's largest oil consumer. It has been difficult to estimate gasoline demand. Last week, revisions of official data showed that demand in May was at its highest level since August 2019: Estimates and independent trackers had put the demand for gasoline below that of last year.

The United States' gloomy economic data could have a negative impact on the oil market, particularly for diesel. According to EIA, the demand for diesel in the United States was 4% less in this year's first five months than it would have been in 2023.

(source: Reuters)