As the report notes, until recently, the focus has been on the supply side with the familiar list of uncertainties - Iran, Venezuela, Libya, and the Vienna Agreement - lifting Brent prices above $70/bbl in early April and keeping them there until late May.
Now however, the main focus is on oil demand as economic sentiment weakens. In fact, in May, the OECD published an outlook for global GDP growth for 2019 of 3.2%, less than IEA's previous assumption. World trade growth has decreased to its slowest pace since the financial crisis ten years ago, as the Netherlands Bureau of Economic Policy Analysis and various purchasing managers’ indices report.
The results for oil demand are now obvious. In the first quarter of 2019, growth was only 0.3 mb/d in comparison to a strong first quarter of 2018, the lowest for any quarter since the fourth quarter of 2011.
The main weakness was in OECD countries where demand reduced by an important 0.6 mb/d, spread across all regions. There were various factors for this, such as:
- A warm winter in Japan;
- A slowdown in the petrochemicals industry in Europe;
- Tepid gasoline and diesel demand in the United States, with the worsening trade outlook a common theme across all regions.
On the other hand, the non-OECD world saw demand increase by 0.9 mb/d, although recent data for China suggest that growth in April was a lacklustre 0.2 mb/d. In 2Q19, IEA expects global demand growth 0.1 mb/d lower than in last month’s Report.
For now though, there is optimism that the latter part of this year and next year will see an improved economic picture. The OECD sees global GDP growth rebounding to 3.4% in 2020, assuming that trade disputes are resolved and confidence rebuilds. This suggests that global oil demand growth will have scope to recover from 1.2 mb/d in 2019 to 1.4 mb/d in 2020
In addition, meeting the expected demand growth is unlikely to be a problem. Plenty of supply will be available from non-OPEC countries. The US will contribute 90% of this year’s 1.9 mb/d increase in supply and in 2020 non-OPEC growth will be higher at 2.3 mb/d with US gains supported by contributions from Brazil, Canada, and Norway.
Moreover, later in June, Vienna Agreement oil ministers will discuss about the future of their output deal. Ministers will note that OECD oil stocks are still at comfortable levels 16 mb above the five-year average. However, they will also say that despite the fact in the first quarter of 2019 weak demand helped create a surplus of 1.1 mb/d, in the second quarter of 2019 the market is in deficit by about 0.4 mb/d, with the backwardated price structure reflecting tighter markets.
This is partly because of the fact that in May the Vienna Agreement countries limited output by 0.5 mb/d in excess of their committed 1.2 mb/d. In the third quarter of 2019, the market could receive more support from an expected pick-up in refining activity.
What is more, high levels of maintenance in the US and Europe, low runs in Japan and Korea, and fallout from the Druzhba pipeline contamination drove poor growth in worldwide refining throughput. This could be about to change, as according to IEA crude runs in August could be about 4 mb/d higher than in May.
This might cause greater tightness in crude markets, particularly for sour barrels if the Vienna Agreement is extended and there is no change in the situations in Iran and Venezuela. Of course, much depends on the strength of oil demand later in the year
In conclusion, a clear message from IEA's first look at 2020 is that there is plenty of non-OPEC supply growth available to meet any likely level of demand, assuming no major geopolitical shock, and the OPEC countries are sitting on 3.2 mb/d of spare capacity. Nevertheless, this must be viewed in the backdrop of the needs of producers especially with relation to investment in the new capacity that will be needed in the medium term.