Plunging oil prices and increasing production from OPEC have driven robust growth in tanker demand since summer 2014.
In 2015, global oil demand surged by about 1.6 million barrels per day, outstripping the past decade’s average annual growth rate of roughly 1 million barrels per day. In fact, this uptick in consumption ranks second to 2010, when global oil demand rebounded from the Great Recession and financial crisis.
Much of last year’s upsurge in global oil consumption stemmed from the steep decline in the price of this commodity.
US retail gasoline prices tumbled roughly 25 percent from year-ago levels in summer 2015, fueling record demand during the summer driving season. After almost a decade of little to no growth, the Federal Highway Administration’s estimate of vehicle miles traveled on US roadways broke to a record high.
Although gasoline demand usually remains flat during the winter months, warmer temperatures and lower prices at the pump have led to year-over-year increases in consumption of the transportation fuel.
European oil consumption increased by about 300,000 barrels per day, despite an economy that has languished in recent years—a testament to the power of lower prices to stimulate demand.
More important, oil demand in Asia has surged. Chinese imports of crude oil have soared over the past 18 months, reaching a record high at the end of last year.
As in the US and Europe, lower prices for gasoline and diesel fuel helped to stimulate Chinese demand. But China has also taken advantage of the slump in global oil prices to stock its strategic petroleum reserve.
This trend should continue in 2016, with China planning to add 145 million barrels of storage capacity this year—110 million barrels for its strategic petroleum reserve and 35 million for commercial purposes.
The US Energy Information Administration and International Energy Agency have called for global oil consumption to grow by 1.2 million to 1.3 million barrels per day—still above the 10-year average, but a slowdown relative to the 2015 rate.
In keeping with our macroeconomic outlook, investors shouldn’t overlook the risk that global oil consumption could fall short of expectations in 2016. That being said, the potential of an outright collapse in demand—akin to what transpired in 2008-09—looks slim given our call for energy prices to remain lower for longer.
Besides growing oil consumption, export trends and traffic on various global trade routes contribute to the supply-demand balance for oil and refined-product tankers.
As we’ve explained on numerous occasions over the past 18 months, excess supply has precipitated the sharp downdraft in global crude-oil prices, fueled by growing production in North America and OPEC’s commitment to maintaining output and retaining market share.
An extended period of elevated oil prices incentivized investment in non-OPEC supply and encouraged banks to lend aggressively to independent oil and gas producers in the US and Canada.
Although Saudi Arabia and OPEC could support oil prices by reducing their output, non-OPEC producers—especially those involved in short-cycle shale plays—would take advantage of higher prices to ramp up activity and take market share. A sustained recovery in oil prices to between $45 and $50 per barrel would encourage further shale development and undermine Saudi Arabia’s effort to drive higher-cost producers from the market.
OPEC’s Secretary General Abdalla Salem El-Badri highlighted this risk at the annual CERAWeek conference in Houston, stating that OPEC hasn’t yet learned how to live with US shale production. The cartel has never had to contend with a source of oil supply that can respond relatively quickly to price improvements. As El-Badri put it, “Any increase in price, shale will come immediately and cover any reduction.”
In other words, Saudi Arabia and other major producers in the Persian Gulf won’t act precipitously to support oil prices.
These challenges should ensure that rallies in crude-oil prices to more than $40 to $60 per barrel will remain short-lived over the next two to three years.
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Elliott and Roger on Aug. 27, 2019
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