Analysis-Global oil demand needs to grow faster to absorb OPEC+ increase By Reuters

By Alex Lawler, Dmitri Zhdannikov and Shariq Khan

LONDON (Reuters) – Growth in global oil demand must accelerate in the coming months or the market will struggle to absorb an increase in oil supply that OPEC+ plans to make from October, according to data, analysts and industry sources.

Growth in oil demand in the first seven months of the year from top consumers the US and China failed to meet some expectations, even before renewed fears of a US recession triggered a global sell-off in stocks and bonds in this week.

If the economy continues to slow, oil demand growth will likely slow with it. That will mean OPEC+ will either have to delay plans to pump more oil or accept lower prices for more supply, analysts said.

“Under the current circumstances of significant recessionary risk, OPEC+ is unlikely to move forward with planned October increases,” said Gary Ross, CEO of Black Gold Investors and a veteran OPEC watcher.

The price of oil fell below $80 a barrel in August — less than most OPEC+ members, or the Organization of the Petroleum Exporting Countries, and allies like Russia have to balance their budgets.

“Oil demand is definitely at downside risk,” said Neil Atkinson, an independent analyst who previously worked at the International Energy Agency, citing concerns about the Chinese and U.S. economies.

“It’s very difficult to see how prices can rise significantly if demand is slower than we thought,” he said, adding that he expected OPEC+ to go into a hiatus to increase production.

For the first seven months of 2024, China’s crude oil imports totaled 10.89 million barrels per day, down 2.4 percent from a year earlier, official data showed on Wednesday.

China’s falling diesel consumption, as the use of LNG-fueled trucks grows, is weighing on domestic demand for the fuel, as is a sluggish economy hampered by a prolonged housing crisis.

In the United States, oil consumption through July rose by 220,000 bpd a year to an average of 20.25 million bpd, according to Reuters calculations based on government estimates. Demand will need to accelerate to reach the government’s 2024 forecast of 20.5 million bpd.

Whether or not global demand will reach the levels needed to absorb the extra supply this year is difficult to gauge because of a record variance in how the world’s most respected oil demand analysts at OPEC and the IEA measure demand to date.

There is a time lag in oil consumption data, and preliminary figures are often revised. That leaves forecasters to include their best guesses in some of their demand figures.

OPEC pegs global demand growth at 2.15 million bpd in the first half of 2024, while the IEA estimates it at 735,000 bpd. The IEA advises industrialized countries on energy policy.

OPEC’s estimate of demand growth in the first half of the year is little changed from earlier in the year. The IEA cut its estimate of demand growth for the first half of the year from 1.19 million bpd forecast in January.

The IEA estimated that China’s consumption contracted in the second quarter, while OPEC estimated that it rose by more than 800,000 bpd. China is one of the main reasons for the difference in outlook for the full year as well as the first half of the year.

Global growth should accelerate slightly in the second half if OPEC’s first-half demand estimates are correct. But if the IEA is right, demand should accelerate quickly.

The second half is usually the busiest period because the simple fact of global economic growth increases oil demand and because it includes the peak season, the Northern Hemisphere harvest and purchases in preparation for winter.

For demand growth to meet OPEC’s full-year forecast, it would have to accelerate to an average of 2.30 million bpd in the second half, according to Reuters calculations. Demand needs to rise by 1.22 million bpd in the second half to meet the IEA’s full-year forecast.

OPEC and the IEA are scheduled to update their demand forecasts next week.

OPEC+ SUPPLY INCREASE

OPEC+ last week confirmed its plan to start raising output from October, with the warning that it could be halted or reversed if necessary.

The increase is based on demand hitting OPEC’s forecast, which would boost oil demand from the producer group and its allies. OPEC+ pumps more than 40% of the world’s crude oil.

If OPEC’s demand forecast is realized, OPEC+ crude oil demand is expected to reach 43.9 million bpd in the fourth quarter, up from production of 40.8 million bpd in June, theoretically allowing , space for additional production.

OPEC+ has a month to decide whether to start releasing oil from October, and the group will study oil market data in the coming weeks, a source close to the group said.

Saudi Aramco CEO Amin Nasser said on Tuesday he expected an increase of between 1.6 and 2 million bpd in the second half of the year.

Two OPEC sources said it was unclear whether demand was growing as fast as needed to meet OPEC’s third-quarter forecasts. OPEC did not respond to a request for comment.

THE US REQUEST IS NOT CLEAR

The IEA says slower economic growth and a shift to electric vehicles in China have changed the paradigm for the world’s second-largest economy, which for years has fueled global oil consumption. OPEC believes that strong growth persists.

Early indications of China’s August crude imports, such as those from intelligence firm Kpler, point to a small rebound from July. Two traders who deal with China’s crude purchases from West Africa said August oil demand was weak.

Global demand for planes this year is expected to surpass 2019 levels, according to the International Air Transport Association, although IATA said in June that international travel to Asia remained subdued, particularly in China.

“The big levers that everyone pointed to for demand growth were aircraft demand and China,” said a source at an oil trading company. “Chinese demand has not been strong and aircraft demand is decent in Europe, but it has not fully recovered (from the pandemic).”

In the United States, the biggest oil consumer, gasoline demand proved hard to gauge: revisions to official data last week showed May demand was at its highest level since August 2019. Earlier estimates and independent trackers pegged demand below last year.

Tough economic data from the United States could also spell trouble for oil markets, especially diesel. U.S. diesel demand was about 4% lower in the first five months of this year than in 2023, according to EIA data.