Much of the current oil market discourse appears to be fixated on the supply dynamic, moves of the 14-member oil producers’ group OPEC and its 10 non-OPEC allies in that context, and a possible impending glut.
The International Energy Agency (IEA) which has continually reminded the market about a possible flood of non-OPEC barrels, not just from the U.S., but Brazil, Canada, Guyana and Norway as well.
But an overt focus on the supply-side, whether intentional or otherwise, seems to detract attention from where oil demand growth might be heading in 2020. The direction of global demand is far from certain with the U.S.-China trade spat showing no signs of an immediate settlement, uncertainty over how Brexit will unfold, and a slowdown in German economic activity.
Alongside all of this is another macroeconomic concern that cannot be ignored, according to rating agency Moody’s – a worrying outlook on the very emerging markets considered the main drivers of oil demand growth.
In fact, growth in key emerging markets slowed significantly in 2019, and the agency’s outlook for 2020 has tipped over to negative due to uncertainties surrounding “trade, politics and policy.”
Of course, individual emerging economies may have different degrees of exposure to each of these uncertainties, since the grouping encompasses a broad range of countries across Asia, Latin America, Eastern Europe, Middle East and Africa, but Moody’s says the overall picture is not one to be optimistic about.
“Although recession risk is in focus globally, we do not expect a recession to materialize in any of the larger emerging market economies except in Argentina,” says Moody’s Senior Vice President Gersan Zurita.
“Emerging markets will continue to have higher growth than developed markets with an expected average economic growth above 4.5% in 2020, compared with just under 1.5% across the largest advanced economies in 2020. However, growth rates are well below their historical averages, particularly in larger economics like Mexico, Russia, India and China.”
It is a curious mix – Mexico and Russia are major crude exporters, while India and China are two of big three global crude importers. With the exception of India, all three economies faced challenges in 2019. Now even the Indian economy is showing signs of strain after a heavier than usual monsoon season dented economic activity in 2019.
Market consensus is that global crude oil demand growth might well end up averaging ~1.1 million barrels per day (bpd) in 2019, resulting in demand averaging just north 100 million bpd. Uncertainties pertaining to emerging markets, especially challenges associated with China’s domestic re-balancing, coupled with elevated recession risks in Europe and the U.S. do not augur well for 2020.
IEA forecasts global demand growth for 2020 at 1.2 million bpd, and OPEC puts it at 1.4 million bpd. Based on the global macroeconomic challenges, and in the absence of a speedy resolution of the U.S.-China trade spat, both projections appear optimistic. In fact, demand growth could come in as low as 0.7-0.8 million bpd; near the bottom end of a range that emerged in recent Reuters poll of 42 market economists and analysts.
If, as the IEA predicts, non-OPEC oil production growth will come in at around 2.3 million bpd, in the most negative scenario, that could be three times over demand growth levels for 2020. It all points to the one thing – no matter how deep production cuts instituted by OPEC and its Russian-led allies are, price support to fire up oil prices would be hard to come by if economic activity remains as lackluster as is currently feared.