Oil bulls who’ve cheered a rebound of 40 percent from a six-year low should take heed: Unless demand accelerates, the rally is in danger.
The omens aren’t good. The U.S. government expects global consumption to grow next year at less than half the rate of 2010, when the world was emerging from a previous recession. The growth is insufficient to close the gap with rising supply, according to Royal Dutch Shell Plc, Europe’s biggest energy producer.
The last time oil crashed, during the 2008 financial crisis, China’s appetite for commodities seemed insatiable, and powered prices higher. This time, Chinese fuel use is growing at half the rate of the past decade, and sliding U.S. shale output could reverse as prices rise, smothering the gains.
“The recent rally appears driven by investors looking at catching the bottom of the market and the expectation that U.S. oil production has reached a turning point,” said Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy. “But fundamentals, notably in the U.S., have not changed much.”
West Texas Intermediate crude, the U.S. benchmark, has climbed more than $17 a barrel from a six-year low of $43.46 on March 17. WTI for June delivery fell 25 cents to end at $60.50 a barrel on the New York Mercantile Exchange.
Global oil demand will grow just 1.3 million barrels a day to 94.58 million next year, the Energy Information Administration said Tuesday. It jumped 2.89 million in 2010 after the previous price crash.
In the U.S., consumption will increase 0.4 percent next year to 19.44 million barrels a day, leaving it at a lower level than in 2008.
“There are pockets of strength, but the days where we saw greater than 1.5 percent oil demand for a year are probably largely behind us,” said Michael D. Cohen, an analyst at Barclays Plc in New York.
Consumption growth is not enough to bridge the divide with supply, Simon Henry, Shell’s chief financial officer, said April 30 on a conference call. “The supply overhang is potentially quite a bit higher for some time to come.”
China’s fuel demand will grow by 3.1 percent next year to 11.34 million barrels a day, according to the EIA. That compares with an 11 percent jump in 2010 that helped boost crude prices by 15 percent. Annual growth has averaged 5.2 percent in the past 10 years.
China’s economy will expand by 6.8 percent this year, the International Monetary Fund forecast last month. That would be the slowest pace since 2008.
“The Chinese economy is faltering and the government is scrambling to keep it growing,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “If these interventions don’t work as hoped, the economy will slow further and with that will be a decline in oil demand.”
Global oil production will rise 1.7 percent to 95.1 million barrels a day this year, while demand will increase 1.5 percent to 93.9 million, according to Goldman Sachs Group Inc.
“Despite this perception of improving fundamentals, our updated supply and demand balance points to a still well oversupplied market in 2015,” Goldman analysts including Jeffrey Currie said in an e-mailed report dated May 11. “While low prices precipitated the market rebalancing, we view the recent rally as premature.”
The drop in oil prices since last summer is boosting the demand outlook, EIA Administrator Adam Sieminski said Tuesday. Global production will still be more than consumption in 2015 and 2016, the EIA said. That will increase inventories by 1.8 million barrels a day in the first half and 900,000 in the second.
U.S. oil production will grow each year through 2020, rising a total of 14 percent from this year, according to the EIA’s Annual Energy Outlook. Petroleum demand will gain less than 3 percent during the same period.
The record drop in rigs drilling for oil in the U.S. could bottom out this month, with operators already reviving operations in parts of Eagle Ford and Permian in Texas, Morgan Stanley said. The rig count dropped to 668 in the week ended May 8, the lowest since 2010, according to Baker Hughes Inc.
U.S. monthly production will decline in the third quarter from the second but will increase again in the last three months of this year, EIA forecasts.
“We’ll see some demand recovery because of lower prices over the long term, but demand is not going to grow as fast as supply,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.