CALGARY — Oil prices tumbled Tuesday on a report from the International Energy Agency that global demand growth is shrinking, raising concerns over whether the economic boost from low fuel prices has run its course.
In its latest monthly oil report, the Paris-based agency signaled that the economy may have wrung dry any savings from prolonged low prices, saying “stimulus from cheaper fuel is fading” as the global supply glut persists.
“We’ve had two years now of this, so yes, the upward impact of demand from low oil prices is easing,” said Ann-Louise Hittle, an analyst with consultancy firm Wood Mackenzie.
While depressed prices have wreaked havoc on oil-dependent countries, cheaper fuel costs were largely seen as a buoy in the broader economy that would help spur much-needed activity.
Concerns over the fading appeal of cheaper fuel prices come as IEA data shows global oil demand growth shrinking.
Global oil demand growth peaked at 2.3 million barrels per day during the third quarter of 2015, and has been falling in 2016. Demand growth in the first quarter of 2016 was 1.6 million barrels per day, but slid to 800,000 barrels per day in the third quarter, according to IEA data.
However, average demand growth across 2016 of 1.3 million barrels per day is only 100,000 barrels per day lower than last month’s estimates, said Hittle, and falls in line with her the company’s estimates earlier this year.
“It isn’t particularly bearish in our analysis,” she said.
The IEA said demand growth in OECD countries has “all but vanished” during the third quarter of 2016, while Europe is stagnant and the Asian growth engines of China and India are showing signs of tapering.
Persistently high supplies of oil and tepid global demand have kept markets out of balance in recent years. At its peak, oil markets had an excess supply of more than two million barrels per day.
While lower consumption was partly due to temporary disruptions, the agency warned that if demand growth continues to slide oil markets could remain in surplus for longer than expected. In its August report the IEA estimated markets would reach a supply-demand balance by mid-2017.
Despite fears over slumping demand, Asian growth is expected to continue.
Wood Mackenzie expects Chinese oil demand in 2016 to grow by an average 390,000 barrels per day, while India is estimated to grow by 200,000 barrels per day compared to last year’s average. Hittle said concerns over slowing demand growth are overblown.
“It’s just that both of them are growing, particularly in the case of India, at a slower rate as we head into the fourth quarter,” she said.
That fall in demand in India is due to a number of factors, including a decrease in demand for distillate fuels used in the irrigation of crops. India’s consumption of distillates remained high for the first half of 2016 as low levels of tropical rainfall in recent years forced farmers to irrigate their crops for longer periods. However, above-average rainfalls in the second half of the year have since erased that demand.
In China, oil consumption temporarily fell during the G20 meeting in Hangzhou as many facilities were shut in — a common method used by the Chinese government to clear its heavily polluted skies. But a return to normal in the fourth quarter could lead to “at least a partial” rebound, the agency said.
We’ve had two years now of this, so yes, the upward impact of demand from low oil prices is easing
Since 2014 about 1.4 million barrels per day of new production have been shut in as depressed prices roiled markets. But stubbornly high oil storage volumes and the staying power of U.S. shale producers has continued to keep oil prices down.
Most analysts expect prices for gasoline and other refined products to remain low, although some dispute the premise that lower oil prices translate into higher demand. In a research note in February, Citi Bank said low oil prices could actually harm the broader economic outlook because it compounds negative market sentiment in some regions.
“High prices are supposed to mean lower demand and vice-versa, and this remains true if one is sitting in Los Angeles or London, but not so much if one is sitting in Lagos or Moscow or Dubai or Sao Paulo.”
Hittle said the U.S. is one of the few markets still seeing growing gasoline demand, as consumers continue to favour heavier-duty vehicles such as SUVs and trucks.
Futures contracts for benchmark crude West Texas Intermediate fell
3.02 per cent Tuesday as of 3 p.m. eastern time, settling at $44.90. The
contract for Brent Crude was down 2.63 per cent to $47.05.