Oil markets have had an interesting past couple of months, but what has remained more or less the same is that international demand for oil has been struggling over the past few months.
While OPEC cuts might have initially pushed prices up while recent oil tanker attacks sent oil surging even more, this has largely been counteracted by America’s growing domestic output.
With the U.S. witnessing record quantities of crude and gas production in the Permian Basin, growing supplies have continued to suppress prices. Coupled with the ongoing global economic worries surrounding the U.S.-China trade deals, the outlook for oil demand looks bleak.
For these reasons, the International Energy Agency (IEA) updated its prediction, cutting oil demand for the full-year while subtly casting the blame on President Trump’s ongoing trade negotiations with the eastern superpower.
“There have been concerns about the health of the global economy expressed in recent editions of this Report and shown by reduced expectations for oil demand growth. Now, the situation is becoming even more uncertain: the US-China trade dispute remains unresolved and in September new tariffs are due to be imposed,” read the IEA report. “Tension between the two has increased further this week, reflected in heavy falls for stock and commodity markets. Oil prices have been caught up in the retreat, falling to below $57/bbl earlier this week. In this Report, we took into account the International Monetary Fund’s recent downgrading of the economic outlook: they reduced by 0.1 percentage points for both 2019 and 2020 their forecast for global GDP growth to 3.2% and 3.5%, respectively.”
Overall, global factors such as the ongoing trade war as well as growing American surpluses are outweighing rising geopolitical tensions in the Strait of Hormuz, which is a critical transit route in the Gulf where a significant portion of the world’s oil output comes from.
Between January and May, demand has only gone up by 520,000 barrels per day, and the IEA ended up downgraded its global growth forecast for 2019 and 2020 by 100,000 and 50,000 barrels per day for each year respectively.
While it might not seem that high, this reduction marks a significant downgrade from the agencies earlier prediction last year where they predicted 2019 oil demand would grow by 1.5 million barrels per day. As of today, the IEA estimates output will only grow by 1.1 million barrels per day, a 27 percent reduction in terms of what was originally expected.
Prices for oil have continued to fall ever since the beginning of the second quarter of 2019. International standard Brent crude fell to below $57 per barrel this week, the lowest point seen since January and represents a 26 percent fall since April. OPEC has repeatedly warned that they were drawing the line at $50, promising further supply cuts should the price of oil fall that low.
However, some analysts have gone so far as to say that prices could fall as low as $30 per barrel over the next several months. While it seems hard to imagine that prices could reach such a low point, there’s definitely a case to be made that the fundamentals of oil demand aren’t strong enough to support the ever-increasing supply being produced.