Oil demand to 2018: Where could we be wrong?
Global oil demand is in for a year of strong growth but given the delicate rebalancing in the oil market, even small changes to our forecast could have major implications for price.
We highlight the factors that could have the biggest impact on our demand outlook:
1. North America's slow start
Downside risk in 2017: 120,000 b/d
In all, we have total US demand rising by roughly 200,00 b/d in both 2017 and 2018, yet the risk to our forecast is weighted to the downside, especially given the weak start to this year so far. Gasoline prices have inched up to $2.50 per gallon.
Assuming half of the growth that occurred in gasoline last year is lost, the downside risk to demand would be around 60,000 b/d. There is also downside risk around diesel's 60,000 b/d expected recovery, if industrial production remains weak.
2. Weak diesel demand in China
Downside risk in 2017: 40,000 b/d
While we forecast an improvement in the country's manufacturing sector and the drag from diesel to fall from 130,000 b/d in 2016 to just 30,000 b/d in 2017, this view is subject to downside risks. A faster-than-expected cooling of the housing market could reduce commodity demand across the board. Delayed infrastructure investment and a renewed momentum for NGVs would also put pressure on demand, as would US President Trump's potential trade protectionism policies.
3. India's momentum
Upside risk in 2017: 100,000 b/d
Demand has been surprisingly strong over the last two years but we expect rising retail fuel prices and a slowdown in rural economic growth to curb momentum. Our base-case outlook has India's oil demand rising by 200,000 b/d in 2017 - significantly lower than the 290,000 b/d increase in 2016.
Whether India's oil demand surprises to the upside again depends on the recovery in car sales – and gasoline demand - being quicker than expected, a stronger agricultural sector boosting the need for diesel and LPG replacing kerosene as a cooking fuel.
4. A stronger Europe
Upside risk by 2018: 190,000 b/d
Current economic growth drivers are fading. Crucial elections in France, Germany and the Netherlands are a real concern which, coupled with further Greek debt negotiations, have contributed to our view that European oil demand will decline throughout 2017 and 2018.
Where are the greatest risks to our outlook? If the Mediterranean economy were to grow at 2016 rates and North-West Europe were to slow modestly, we could see an upside of 45,000 b/d in 2017 and a much more significant 145,000 b/d over our base case in 2018.
5. Middle East power generation
Upside risk in 2018: 60,000 b/d
Last year, oil use in power fell in the Middle East by around 40,000 b/d. We expect this trend to continue until the end of the decade as increasing volumes of gas displace oil in the power sector.
Any delays to the continued ramp up in gas production at the Al Wasit Gas Program – which is expected to increase Saudi gas production by more than 20% - over the next year could limit the impact. This could amount to an upside risk of around 60,000 b/d of oil use, including 30,000 b/d of crude and 30,000 b/d of fuel oil in 2018.
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