Consumption is key to oil price recovery

Oil prices are treading water in the mid-$40s a barrel awaiting forces to influence their next move.

The disappointing U.S. employment report on Friday and the weaker than expected first quarter GDP growth estimate have economists holding their breath about the U.S. economy’s strength. For oil, the next Short Term Energy Outlook issued by the Energy Information Administration on May 10 may show the next price direction.

April’s Short Term Energy Outlook projected global oil consumption growth of 1.2 million bpd for 2016 and an additional 1.3 million bpd in 2017. The EIA estimates that global oil demand increased in 2015 by 1.3 million bpd, among the lowest annual increases projected by a major oil analytical organization. It is interesting to note the consistency between the EIA’s estimate for oil demand growth and its assumptions about real global GDP growth weighted by oil use.

Between 2015 and 2016, estimated global oil consumption fell by 100,000 bpd at the same time that real global GDP growth declined from 2.4% to 2.3%. That decline is consistent with a forecast for oil demand to fall marginally. What’s not consistent, however, is a forecast for real global GDP growth of 3% for 2017 but only 100,000 bpd growth in oil consumption. Somebody is not participating in that strong 2017 global economy.

Looking behind the overall number, we find that the EIA estimates U.S. oil consumption increased by 300,000 bpd in 2015, but will grow by only slightly more than 100,000 bpd this year. In 2017, U.S. oil consumption is expected to grow by 200,000 bpd. The U.S. plays a key role among the developed economies of the world, accounting for half of the oil consumption growth in 2015 and 2016. In 2017, however, U.S. growth is projected to be twice the amount of OECD growth as the EIA expects European and Japanese oil consumption to fall.

In dissecting the components of the EIA’s forecast, it is clear that developing countries are where oil consumption is truly growing, despite the magnitude of oil use in the U.S., European and Japanese economies. It is also important to keep in mind that Asia, the principal growth driver of developing economies, is the oil battleground for Saudi Arabia, Iran and Russia.

We suggest keeping an eye on any adjustments the EIA makes to its oil consumption forecasts, and especially to any change in the growth projections of the developed versus developing economies. A reduction in growth may signal that the current oil price rise will stop and possibly reverse. However, if the EIA boosts its growth assumptions, oil prices should stabilize in the mid-$40s a barrel and possibly climb higher.

One offset to higher prices could be an intensified battle among the big three oil exporters for market share, but that’s a topic for another day.

The views and opinions expressed in this blog are the author’s and not necessarily those of WorkBoat.

About the author

G. Allen Brooks

G. Allen Brooks is a 40-year veteran of the energy and investment industries, serving as an energy securities analyst, an oilfield service company manager, a consultant to energy company managements and a board member of several oilfield service companies. He is the author of the highly regarded energy newsletter “Musings From the Oil Patch” that interprets trends within all sectors of the energy business.

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