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You are here : IndiaNotes >> Market Action >> Commodities >> Brent Crude Oil

Oil Sector Global Outlook 2016 - Part 2

Namrata Shah | 23 Dec, 2015  | Follow Author | Add to my Favourites 
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Oil Demand


Global oil demand is driven by its major oil consumption countries. Following is analysis of 5 major oil consuming countries.


- USA : Significant domestic oil production, falling reliance on OPEC for crude oil and encouraging use of fuel substitute in cars.


- China : Slowdown in manufacturing sector, purchase limit policy for automobiles has impacted auto sales and incentive for electric and hybrid cars would lower demand for crude oil.


- Japan : Major exporter to China and indirectly affected by slowdown in Chinese economy.


- India : High economic growth and Pro-growth policy of government is expected to drive oil demand.


- Saudi Arabia : is net exporter of crude oil.



United States


US crude oil import has fallen from 11.95 million barrels a day in Jan 2008 to 4.36 million barrels per day in Apr 2015.The decrease in crude oil import of 7.5 million barrel per day is compensated by increase in domestic oil production. US was able to increase its oil production from 3.9 million barrels per day in Jan 2008 to 9.8 million barrel per day in Mar 2015.



Although overall US crude oil imports have been declining since 2005, crude oil imports from Canada have been increasing. As of Aug 2015, Canada provided 45% of all crude oil imports to the United States, which is almost equivalent to 3 times crude imported from all Persian Gulf countries.


With Shale gas production, US has achieved energy independence to great extent. From being oil importer, US has become domestic producer.  The rise in domestic production has allowed US to lower its dependence on OPEC oil cartel.



Oil Demand in US


- 2015 Christmas is expected to be one of the warmest winter in US due to El Niño weather phenomenon. This is likely to reduce the demand for heating oil.


- With innovation in automobile industry, fuel efficiency in vehicle has improved, thereby reducing gasoline consumption and accordingly demand for gasoline is lower.   


- US is on its drive to reduce fossil fuel and protect ecological balance. It is encouraging use of electric car. This would lower demand for gasoline and thereby lower demand for crude oil.


- US emphasis on alternative sources of energyby devising policy to boost solar and wind energy.  It recently extended tax credits for solar and wind for 5 years.This would encourage additional capex in renewable power sector and demand for crude oil is likely to remain at low level in near future.


US Oil demand outlook for 2016


In 2016, oil demand is likely to be dependent on economic growth in US and preference for lower gasoline price. However, with encouragement for alternative energy, fuel substitution measure and developments in vehicle efficiencies will continue to put downward pressure on demand for crude oil.


As per OPEC monthly oil report For Dec 2015, US oil demand was 19.43 mb/d in 2014. It is estimated to increase to 19.81mb/d in 2015 and further to 20.06mb/d in 2016.


China


China is facing economic slowdown. However, its oil consumption remains upbeat with 10.9 mb/d during Sep 2015


Oil Demand in China


- China is experiencing low business confidence and its manufacturing sector is slowing down as indicated by low PMI index for 2014 & 2015. China's PMI fell to 49.8 in Jan 2015, thereafter remaining at 50 for almost 6 months before again falling to 49.7 in Aug 2015. As of Nov 2015, PMI index is still below its 50 level. PMI index considers 50 level as no change in activity, value above 50 indicates expansion and value below 50 indicates contraction.



With slowdown in manufacturing activities in China, the disposable income has fallen, lowering demand for vehicles. Fall in manufacturing companies’ profits indirectly leads to low capex activities among those companies. Thereby leading to low demand for oil.


- China GDP –People’s Bank of China (PBOC)has forecasted economic growth of 6.9% for 2015 and 6.6% in 2016.China's GDP growth has moderated since 2014. Low GDP growth in 3Q15 is largely on account of slowdown in the industrial sector.



- Automobiles sales has fallen drastically over the period 2008 - 2015. In 2H/2015, Chinese government reduced purchase tax on small engine cars – which forms 70% of new car sales in country to boosted automobile sales. 


- Economic slowdown in early 2015 and purchase limit polices in tier1 cities and adversely impacted automobile growth in China. So demand from Tier1 cities would only be in form of replacement cars. Further, it is expected that more cities in China would introduce restriction on purchase of new cars to address traffic congestion problem.


On the other hand, Chinese government is disbursing subsides to buyer of electric and hybrids cars to address rising pollution. As a result, there would be lower demand for gasoline from automobile users in China.



- In Aug 2015, China devalued Renminbi (Yuan) making foreign imported goods expensive for its citizen. The weaker currency would make Chinese exported goods cheaper in foreign countries. This is likely to boost its weakening export sector and sluggish economic growth.

 

- In Oct 2015, PBOC reduced its benchmark interest rate to 4.35%. This is 6th interest rate cut by PBOC since Nov 2014. Lower interest rate would release funds and inject liquidity into banking sector, thereby simulate slowing economy and fend off deflationary risks.



- As crude prices has fallen to all time low, China is expanding its stockpiles. It is likely that China would add 70-90 million barrels of oil to its strategic petroleum reserves (SPR). China's crude import rose during Jan - Sep 2015 to 6.65 million bpd, 9% yoy increase in oil import. This incremental oil import is partly driven by its reserve building activities.   


China Oil Demand Outlook for 2016


China is estimated to have low GDP growth rate of 6.6% in 2016 on account of weak global demand for Chinese goods and slowdown of domestic capex activities. Further, demand from automobile sector is also expected to be lower on account of restriction of purchase, subsidies for electric and Hybrid cars and preference for fuel substitution.


Currency devaluation and interest rate cut are likely to boost Chinese economy and thereby increase demand for oil from China.Also, if China continues to build its Strategic Petroleum reserve, then demand for oil would increase, offsetting its low industrial activities.

 

As per OPEC monthly oil report For Dec 2015, China’s oil demand was 10.46 mb/d in 2014. It is estimated to increase to 10.84mb/d in 2015 and further to 11.14mb/d in 2016. As a result oil demand from china is likely to remain subdued in 2016.


Japan


Japan imported 3.1 million barrel of oil per day in Oct 2015.On comparing monthly oil demand, it is noticed that oil demand has been falling since last 3 months. Saudi Arabia and UAE are major supplier of oil to Japan.


Oil Demand in Japan


- Japan’s economy has been struggling with near recession scenario. Japan's government has taken numerous monetary measures, to boost its economic growth. However, the effect of economic stimulus is not as effective as planned.



- Japan's PMI index, which measures performance of manufacturing sector is either falling or has remained stagnant over 2015. This indicates decreasing confidence among business owners. Japan flash PMI for Dec 2015 stood at 52.5 indicating slight contraction in business confidence over Nov 2015. Following graph indicates, PMI index improved in Oct 2015.



- Japan experiences wide variation in its q-o-q GDP growth rate. This wide variation in growth puts Japanese economy in very fragile stage. In2Q/15, Japanese economy faced challenges of shrinking into recession. However, in 3Q/15, the economy expanded and outlook has improved. If low GDP growth rate continues or Japan slips into recession, the demand for oil would be impacted.


- China is Japan's major trade partner. Japan near recession scenario is led by China's slowdown. Japan exports industrial equipment, construction machinery and other capital goods to manufacturing sector companies in China. However, the fading consumer demand in China and weak global demand, has forced china to lower its manufacturing activities and thereby demand for capital goods from Japan has fallen.


- After its massive earthquakes in 2011, most of the nuclear reactor were shut down and oil - fired plants were operated. As a result, Japan was dependent on import for its domestic oil consumption. Now, few nuclear power stations have re-startedand some are in process to getting started, so, the demand for crude oil is likely to fall.


Japan Oil Demand Outlook for 2016


Oil demand from Japan is greatly dependent on equipment and machinery requirement from China. Further, with functioning of nuclear power plants, the demand for oil is likely to reduce. Also, Japan has old and shrinking workforce along with declining income and low demand.


India


Demand for oil from India has been continuously increasing over past few years. Indian government has removed oil subsidies and imposed excise duties. This makes oil expensive for its citizen and full benefit of low oil prices are not passed to end user.


Oil Demand in India


- As per IMF, India is expected to grow at 7.5% for FY/2016 up from 7.3% in FY/2015. Boost in economic growth would drive demand for oil.



- Currently, India’s manufacturing sector contributes 15% to GDP. India is planning to expand the share of manufacturing sector to its GDP to 22% by 2022 by focusing on its Make in India campaign. This would result in additional demand for oil.


- Current government focus on setting up basic infrastructure, boost for smart cities and encouraging FDI in infrastructure sector, would boost overall demand of oil.


- With current fall in oil prices, cars has become more affordable for growing middle class. High disposable income and desire for improved living standard, the demand for cars is expected to increase.


- Lower oil prices are accruing in savings to household, and will be diverted to consumption. This will boost overall economy.


- India generates electricity from hydro sources. However, current power generated is much lower than its consumption demand. Moreover, country has been facing poor monsoon in past So, India is forced to rely on diesel for generating electricity for domestic and industrial consumption.


India Oil Demand Outlook for 2016


Though, demand for oil is expected to grow in India, but it is much smaller base compare to China. So, incremental oil demand from India is not enough to compensate fall in oil demand from China.


Global Oil Outlook for 2016


Global oil demand is directly dependent on country's economic growth, weather conditions and availability of oil substitute. If economic growth continues to be weak in emerging markets (specifically China) during 2016, the demand for oil would not pick up. In Europe, high taxation policies for use of oil and preference for fuel substitute could dampen oil demand in 2016. As per Fitch ratings, the gap between oil supply and demand appears to have peaked at 3 million barrels per day in 2Q/15. This mismatch is unlikely to be corrected until 2H16.

 

Part 1 of this article focuses on Oil Prices, Cost of Extraction, and Analysis of three major oil exporting countries and new entrant Iran. Readers can find it here.

 

Source: BP Statistical review of world energy 2015, US Energy Information Administration, Bloomberg, OPEC Monthly report, Bloomberg, Thomson Reuters, World Oil, Market Realist, Seeking Alphaand Wall Street Journal.

 




About Namrata Shah

Namrata Shah is a Chartered Accountant and an independent finance blogger. She loves analyzing companies financials, business models, corporate governance and other aspects of the companies. She has rich experience in research, valuation and audit, assurance & advisory function in reputed organisations. She blogs at http://finance-nams.blogspot.in/ .

 

For more information please write in to [email protected]

Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.




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