By Julian Lee

As I warned final week, oil demand development is drying up and it’s not over but. Two of the main oil companies have simply minimize their forecasts for incremental demand this yr, however they haven’t gone far sufficient.

The revisions to full-year oil demand development by the Worldwide Power Company (IEA) and the U.S. Power Info Administration (EIA) have been virtually sufficiently small to be shrugged off. The true fear is within the element.

On Tuesday the EIA, a part of the U.S. Division of Power, minimize its 2019 oil demand development forecast to 1.01 million barrels a day. That was down by 60,00zero barrels a day from the earlier month’s view – a tiny revision in a 100-million barrel market. Then on Friday the Paris-based IEA minimize its forecast to 1.08 million barrels a day from the 1.18 million it predicted in July. That, too, might be dismissed as one other minor tweak.

However concentrating on these small revisions misses the purpose. Digging beneath the broad annual modifications into the quarterly numbers paints a way more worrying image. Estimates of incremental oil demand within the first half of the yr had already been slashed nicely earlier than final week’s studies have been revealed. That course of began as model-based forecasts started to get replaced with arduous information.


The downward development is turning into clearer even when there have been bumps alongside the way in which. The IEA made its first large revision to first quarter oil demand development in Could, following it a month later with a second discount that took the determine down to simply 250,00 barrels a day from the 1.16 million that it had been forecasting in January. That quantity has been revised up just a little subsequently as extra nations have reported demand numbers, however nonetheless stands at simply 470,00zero barrels a day, the smallest year-on-year development since 2011.

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The reductions to second-quarter demand development started in June and have seen estimates slashed to close 700,00zero barrels a day by each the IEA and the EIA from about 1.6 million in January. For the interval from January to Could, for which the IEA has full information for many of the world’s main oil shoppers, demand grew at its slowest tempo for a similar interval for the reason that monetary crash of 2008.

So what concerning the third quarter, which is now virtually half accomplished? Right here is the place my alarm bells actually begin ringing.


Till final week, the 2 companies have been nonetheless forecasting strong demand development of about 1.5 million barrels a day for the third quarter. Certainly, the IEA had elevated its forecast for the third quarter in each June and July concurrently it was slashing its estimates for the sooner durations. It cited a mixture of “anticipated stronger financial development within the OECD within the second half of 2019, in addition to the actual fact oil costs stay decrease than final yr,” alongside the commissioning of a number of petrochemical vegetation within the second half of the yr. It additionally famous that its view assumed “that the commerce standoff between China and the US doesn’t deteriorate.”

These assumptions are not tenable. The U.S.-China standoff has deteriorated and it might get quite a bit worse earlier than it will get higher, relying how China responds to the most recent tariff threats from Washington. Fears of a broader financial slowdown are additionally boosting the worth of the greenback towards currencies just like the euro and the Chinese language yuan as buyers search secure havens for his or her cash. That’s making oil costlier in non-dollar economies, offsetting a number of the impression of cheaper dollar-denominated crude.

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Full-year demand development forecasts of round 1 million barrels a day are being supported by more and more constructive outlooks for the fourth quarter. However with predictions for the third quarter additionally drifting down, it might not be lengthy earlier than the IEA and EIA begin lowering these rosy numbers for the ultimate three months of 2019.

That may go away OPEC and mates with a giant drawback. They’ve solely simply agreed to increase their present deal to chop output till the tip of March. That call was meant to point out the group’s dedication to shore up oil costs, but it surely already seems like falling nicely in need of what’s wanted.


Saudi Arabia says it is not going to tolerate a continued slide in costs, but it surely has few choices to halt the hunch. Its manufacturing is already set to fall in September, when it is going to provide prospects with 700,00zero fewer barrels a day of crude than they’ve requested for. It might quickly should drop to ranges not seen for the reason that kingdom was attempting to prop up costs in 2013-14. That coverage didn’t work so nicely for them. Oil costs nonetheless collapsed within the second half of 2014, even with strong demand development.

Costs responded positively to the most recent indicators of Saudi resolve, however it is going to take greater than phrases to forestall the gloom from settling once more. Brent crude fell as little as $55.88 a barrel on Wednesday, wiping out many of the positive factors it had made this yr. However the issue doesn’t lie with provide. Extra output cuts – even when they’re shared amongst OPEC+ producers, which appears unlikely – will do nothing to stimulate oil demand. That may require President Donald Trump to finish a few of these commerce offers he retains tweeting about.

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(This column doesn’t essentially replicate the opinion of, Bloomberg LP and its homeowners)