Portfolio | Could demand destruction keep crude ‘lower forever’?
Benchmark Brent crude floated above the US$50/barrel mark for a few days in early October, only to be dragged back into the high-$40s and languish at those levels, suggesting the market remains focused on an unrelenting supply glut and relatively anaemic demand growth.
US oil rig numbers continued to slide through October and tight oil production growth is finally slowing down, with 2016 now projected to record the first on-year contraction in output in five years. But the question is, will the expected 400,000 bpd drop in US production next year be enough in the face of up to 1 million bpd of extra supplies from Iran?
Equally crucially, as emerging economies round the world face fresh headwinds, and global GDP growth forecasts continue to be revised downward, how confident are we of the rise in oil demand next year?
Carbon Tracker Initiative is predicting demand destruction of all three major fossil fuels -- oil, gas and coal -- over the coming decades
The average of the latest forecasts by the International Energy Agency, the US Energy Information Administration, and OPEC is a 1.28 million bpd year-on-year rise in global oil consumption in 2016, compared with an estimated 1.53 million bpd growth this year.
China, which reported 6.9 per cent GDP growth in the third quarter, its slowest since the Global Financial Crisis of 2008, has had voracious appetite for crude this year, helped by the filling up of its newly built strategic storages.
Chinese crude imports over the first nine months of this year averaged 6.68 million bpd, up a strong 8.8 per cent on the corresponding period of 2014. But attention now seems to have turned to what Chinese demand will look like once the storages have been filled.
Even a fresh round of interest rate cuts by Beijing on October 23, days after the European Central Bank President Mario Draghi signalled the possibility of another large stimulus package in December for the Eurozone, failed to ignite a rally in oil futures.
The greenback’s volatility also fed into oil prices, with the US dollar index steadily sliding through the first half of the month and recovering in the second half, as expectations of a December Fed rate hike gained ground.