LONDON (Reuters) - Substantially lower oil prices are on the way to rebalancing the oil market, as demand accelerates and both shale and other non-OPEC oil production turns down.
But how quickly the rebalancing is completed depends critically on whether rapid demand growth reported in the first half of 2015 can be sustained in the second half of the year and into 2016.
A fragile global economy threatens the progress of rebalancing, Gary Ross, chief of PIRA Energy Group, told the Financial Times in an interview published on Wednesday.
Global oil demand is forecast to rise by 1.7 million barrels per day (bpd) in 2015, according to the International Energy Agency (IEA), which would be the fastest annual increase for five years.
The secretariat at the Organization of the Petroleum Exporting Countries (OPEC) pegs demand growth at 1.5 million bpd in 2015 compared with 2014.
The U.S. Energy Information Administration (EIA) is more cautious and puts demand growth at just 1.2 million bpd.
In a measure of the uncertainty surrounding consumption, the gap between the highest and lowest forecasts is equivalent to 0.5 million bpd, 30-40 percent of the entire projected increase in demand.
All three major statistical agencies forecast China will contribute about one quarter of global demand growth in 2015, underscoring the country’s critical importance to the oil market.
But China also remains the biggest source of uncertainty because it accounts for such a high share of growth yet its economic outlook is so hard to forecast and its fuel data are so opaque.
The impact of any slowdown in China would be magnified because of its trading links across the whole Asian region.
“A riddle, wrapped in a mystery, inside an enigma,” is how Britain’s wartime prime minister Winston Churchill described Russia in 1939, but it could equally apply to China’s oil demand in 2015.
China’s actual fuel consumption remains a matter of guesswork.
EIA forecasts China’s oil consumption will increase by around 300,000 bpd in 2015, less than 3 percent. The IEA and OPEC put the increase slightly higher at around 400,000 bpd.
All three agencies forecast demand will grow by 0.3-0.4 million bpd in 2016, according to monthly projections published in September 2015.
These numbers imply much slower growth in demand than the data published by China’s National Bureau of Statistics (NBS).
China has reported to the Joint Oil Data Initiative (JODI) that oil demand rose by a massive 1.3 million bpd, about 13.6 percent, in the first half of 2015 compared with the first half of 2014.
NBS reports some truly staggering increases in refinery production of the main fuels in the first eight months of 2015.
Gasoline production is up 11 percent, kerosene is up 21 percent, and diesel is up 4 percent so far this year compared with the same period in 2014.
Problems with China’s consumption data are well known, including the country’s refusal to publish how much crude is being taken into strategic storage and the lack of adjustments for exports.
Estimates published by my colleagues put the amount of crude going into strategic storage at as much as 0.5 million bpd so far in of 2015.
Once adjustments are made for strategic stocks and refined exports, it is possible to come up with an implied increase in domestic consumption of around 300-400,000 bpd, which is in line with the major agencies (“China’s crude imports are robust, data are not” Sep 9).
But there is enormous uncertainty surrounding all these adjustments and the exact state of demand continues to baffle statisticians.
OPEC’s latest monthly oil report gives an indication of just how difficult it has become to work out what it is really going on.
“In July 2015, Chinese oil demand continued its high pace of growth, increasing by around 500,000 bpd or more than 5 percent year-on-year, despite signs of a slowing economy,” OPEC wrote.
Demand for LPG, jet/kerosene and gasoline all increased at double digit rates compared with year before, though diesel consumption was up only slightly.
For the year to date, average demand has grown by well above 400,000 bpd “driven mainly by LPG feeding into the growing petrochemical sector as well as gasoline, which was supported by lower prices and robust car sales.”
Gasoline demand was up by 400,000 bpd in July, supported by massive sales of sport utility vehicles, up by 44 percent in the first seven months of the year, even as car sales rose only 3 percent.
China’s customers are choosing bigger and more fuel-hungry vehicles as gasoline prices fall.
The IEA tried to explain the same data issues in its own September report: “Despite recent concerns regarding the strength of the Chinese economy .... Chinese oil product demand remains remarkably resilient.”
Fuel deliveries into the domestic market were up by around 550,000 bpd in the first half of 2015 compared with 2014, an increase of around 5.2 percent.
“Deliberate efforts to steer the economy towards additional domestic consumption, at the expense of heavy manufacturing/exports, has supported a swing towards more rapid gasoline/jet demand growth versus lagging gasoil/residual fuel oil,” the agency explained.
The IEA is nonetheless forecasting a sharp slowdown in the second half of the year as the economic slowdown and stock market turmoil bites.
Car sales, business surveys and macroeconomic statistics all point to a slowing economy, but the impact on fuel sales is highly uncertain.
The agency predicts year-on-year consumption growth will slow from 5.6 percent in the second quarter to 3.7 percent in the third and 2.3 percent in the fourth.
Concerns about the completeness, quality and transparency of China’s statistics are one of the biggest challenges for oil forecasters.
In September, Fatih Birol, the IEA’s new chief, broke with tradition and made China the destination of his first overseas trip rather than an IEA member country.
Birol explained that the choice was no coincidence. “By almost any measure, China is the most important player in the global energy market,” Birol told the Chinese Academy of Social Sciences.
Birol said that he wanted China to eventually become a full participant in the work of the IEA, something about which China has often appeared reluctant in the past.
There are many areas where China and the IEA could benefit from closer cooperation, ranging from energy security to climate change.
Birol did not mention statistical cooperation but it should be a high priority because at the moment uncertainty about China’s fuel consumption and crude stockpiles have become the largest error terms in global oil market data.
(John Kemp is a Reuters market analyst. The views expressed are his own)
Editing by William Hardy