Oil & Gas
Global Oil Demand Grows at 1.6% YoY
December 2017
Brent oil prices rose steeply to US$64.3 a barrel in early November then weakened to US$61.4 a barrel mid-month before rallying to generally hold above US$62 a barrel for the remainder of the month. This can be attributed to supportive signals from Saudi Arabia and Russia for another extension of the production cut deal beyond March 2018, which was formally agreed to by OPEC members on the 31st of November.

Oil production will be cut until the end of 2018 to clear the global crude glut, however a possible exit from the deal was signalled if markets overheat.  OPEC, together with a group of non-OPEC producers led by Russia, has been restraining output since the start of this year to try to lower global inventories and support prices.  Other factors that buoyed oil prices in November included the decline in supply from Venezuela, Algeria, Iraq and Nigeria; ongoing shale-related reductions in U.S; low U.S. commercial crude oil inventories; and tensions in the Middle East.

Among the main factors capping oil price gains is U.S. field production of crude oil which reached 9.64Mbpd in mid November, slightly higher than in October and up by more than 1.1Mbpd y-o-y.  Production was almost entirely derived from the Lower 48 still recovering from the October impacts of Hurricane Nate which resulted in the shut-down of nearly 95% or 1.6Mbpd of oil output.

According to EIA, in the short term the price difference between Brent and WTI crude oil is forecast to remain at approximately US$6 per barrel through 1Q 2018.  WTI averaged US$2 per barrel lower than Brent between January and August in 2017 and US$6 per barrel lower than Brent in September, October and November.  The wider forecast spread reflects continuing price developments that have emerged over the past two months that likely resulted from transportation constraints in moving U.S. domestically produced crude oil from Cushing, Oklahoma, and from the Permian basin in Texas to the U.S. Gulf Coast.   As U.S. crude oil production has increased, particularly in regions such as the Permian Basin, so has the need for more transportation infrastructure to accommodate it. However, the rate of production growth and the scale and timing of when additional pipeline capacity is brought online are not always aligned.

In November, U.S. commercial crude oil inventories only increased marginally by 3.2Mbbl month-on-month from 456.6Mbbl to 459.8Mbbl.   The current lower stock levels still reflect the impacts of Hurricane Nate; however stock inventories are forecast to grow rapidly to approximately 500Mbpd by the end of 1Q 2018 in response to the approaching U.S. winter seasonal demand.  U.S. refineries crude oil input rate increased by 334kbpd to 16.64Mbbl over the week ending 10th November, this was reflected in their total utilisation rate increasing by 1.4% week-on-week to a 91.0% operable utilisation.

Global crude oil demand is expected to weaken marginally by 0.1Mbpd in 4Q 2017, largely attributed to the relatively mild early northern hemisphere winter temperatures.  However, overall demand is expected to grow at 1.5Mbpd in 2017 (or 1.6%) y-o-y to 97.7Mbpd   We also foresee an ongoing growth in oil demand by OECD Southeast Asia, the Americas, Europe as well as non-OECD China and the Middle East leading to a year-on-year growth of 1.3Mbpd (or 1.3%) to 98.9Mbpd in world oil demand in 2018.    

Global natural gas consumption is forecast to grow in the coming five years on the back of abundant supply, low prices and its crucial role in reducing air pollution emissions.  Over the next five years its forecast gas demand will grow at 1.6% per year, equating to an annual gas consumption of almost 4 Trillion cubic metres (Tcm) by 2022, up from approximately 3.6Tcm in 2016.   Some 90% of the anticipated gas demand growth comes from developing economies such as China, India and Indonesia.  China alone accounts for 40% of global demand growth and this is forecast to increase by 8.7% per year to 2022, which has been assisted by the country’s policy drive to improve air quality.  

With respect to supply, global crude oil production increased 100kbpd in October to 97.5Mbpd the entire increase is attributed to crude oil produced by non-OPEC countries.    Non-OPEC oil suppliers are expected to produce more in Q4 2017 (by 0.7Mbpd) compared to Q3 2017 to reach a rate of 58.6Mbpd.  By 2Q 2018 non-OPEC supply is forecast to reach 59.37Mbpd, led largely by US suppliers.  OPEC crude output declined 151kbpd in October due to reduced production from Venezuela, Algeria, Iraq and Nigeria.  OPEC’s supply of 32.59Mbpd was the lowest since 2Q 2017 and down 830kbpd on the highs seen the same time last year. U.S. crude production increased to 9.64Mbpd in mid November, up by 1.0Mbpd y-o-y with production from U.S. shale plays continuing to make substantial contributions to overall U.S. domestic oil production.

As the world’s largest gas producer, USA is expected to increase gas production over the coming years, and account for almost 40% of global supply growth by 2022.  U.S. gas operators are demonstrating their ability to counter the effects of lower prices by producing more gas with fewer rigs.  US gas supply is forecast to grow by 2.9% per year up to 2022, adding approximately 140Bcm to global production.  Half of the production increase will become feed for the LNG export market and by then the USA could well challenge Australia and Qatar as the leading global LNG exporter.

Iran which currently produces approximately 180Bcm per year is expect to extend its position as the leading gas output growth country in the Middle East, potentially adding 150Bcm per year to the regions gas supply in the period to 2040.  The lifting of international sanctions has raised the potential of continued development for the super-giant South Pars gas field.