Weak oil demand into 2020

Published on

October 27, 2019


Article by

Hermes Pérez

The oil market faces the possibility that the demand for crude oil will weaken in the remainder of 2019 and in the beginning of 2020. In this regard, among the elements that can support this claim would be:

•          The end of the summer driving season in some countries, which will take away an important factor of demand support.

•          The slowdown in the global economy growth for 2019. According to the World Economic Outlook from the International Monetary Fund (IMF), the world growth was downgraded in October “by 0.3 % to 3.0 % and by 0.2 % to 3.4 % for 2019 and 2020, respectively, from its April forecast—illustrates a slowdown in global activity, driven in particular by emerging markets and the euro area”.

•          The world economic growth of 3% estimated in 2019 is the slowest pace since the global financial crisis. This subdued economic growth is a consequence of several factors, such as: rising trade barriers; elevated uncertainty surrounding trade and geopolitics; idiosyncratic factors causing macroeconomic strain in several emerging market economies; and structural factors, such as low productivity growth and aging demographics in advanced economies.

•          In other words, the commercial war between China and the United States, the uncertainty associated with Brexit and the increase in geopolitical tensions in the Middle East, among others, are reducing prospects for economic growth. This situation is adversely affecting the global business climate and the demand for crude oil during the rest of the year and at the beginning of 2020.

In this sense, this weaker global economy has raised concern about the strength of oil demand, which was amplified by a buildup of US crude oil stockpiles. However, supply outages and geopolitical tensions in several regions of the world have overshadowed the weakness in the demand for crude oils and supported prices.

For its part, Venezuela has been experiencing an immense productive decline in 2019, which does not seem to end. Russian oil exports were partially halted because of pipeline contamination in May. Moreover, several attacks on Saudi oil infrastructures affected around of 5% of global crude oil and raised geopolitical tensions in the area.  Further support for oil prices came from the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC oil exporters (including Russia), which agreed to extend their crude oil production cuts beyond their initial six-month period for an additional nine months until March 2020.

On the demand side, weaker global economic fundamentals have contributed to lower prices due to the slowdown in global activity, driven in particular by emerging markets and the euro area.

In line with this slowdown, several agencies have also cut their forecasts of demand growth. The International Energy Agency (IEA) reduced its demand growth forecasts for 2019 and 2020 by 0.1 million barrels a day (mbd) to 1 mbd and 1.2 mbd, respectively. For 2020, a weaker GDP growth forecast was the main reason for reducing its oil demand outlook.

In the same way, OPEC reduced its world oil demand growth reflecting the latest available data in the world economic outlook. In addition to that, there is an ongoing decarbonization trend in the world in the long run. However, global greenhouse gas emissions increased again in 2018 following strong global growth.

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