Global oil demand growth needs to accelerate in the coming months or the market will struggle to absorb the additional supply that OPEC+ plans to increase from October, according to data, analysts and industry sources.

Demand growth in the United States and China, the world’s two largest oil consumers, has been less than impressive in the first seven months of this year, even before fears of a U.S. recession reignited a global sell-off in stocks and bonds this week.

If the economy slows further, oil demand growth could slow as well. That means OPEC+ will either have to delay plans to increase production or accept lower oil prices, analysts said.

Gary Ross, CEO of Black Gold Investors and a veteran OPEC observer, said OPEC+ is unlikely to go ahead with its planned October production increase amid the current risk of a severe recession.

Benchmark Brent crude prices fell below $80 a barrel in August, below the level most OPEC+ members need to balance their budgets.

“There are definitely downside risks to oil demand,” said Neil Atkinson, an independent analyst who formerly worked at the International Energy Agency (IEA), citing concerns about the U.S. economy.

“It will be very difficult for prices to rise significantly if demand growth is slower than we expect,” he said, adding that he expected OPEC+ to pause its production increases.

U.S. crude consumption rose 220,000 barrels per day (bpd) in July from a year earlier to an average of 20.25 million bpd, according to Reuters calculations based on government estimates. Demand growth will need to accelerate for the rest of the year to reach the government's full-year average forecast of 20.5 million bpd.

Whether global oil demand will absorb the extra supply this year is difficult to judge, as the most respected analysts in authoritative bodies such as OPEC and the IEA have so far shown record disagreement on demand forecasts.

Oil consumption data is released with a time lag and preliminary figures are often revised, leading forecasters to incorporate best estimates into some demand figures.

OPEC sees global demand growth of 2.15 million bpd in the first half of 2024, while the IEA, which advises industrialised countries on energy policy, sees 735,000 bpd.

OPEC's estimate for first-half demand growth is little changed from the start of the year. The IEA's first-half demand growth estimate has been slashed from 1.19 million bpd in January. The gap in expectations for Chinese oil demand is one of the main reasons for the huge divergence between OPEC and the IEA.

The second half of the year is typically the peak period for global oil consumption as it includes peak driving, harvest in the northern hemisphere and purchases in preparation for the winter.

To meet OPEC's full-year forecast, demand growth would need to accelerate to an average of 2.3 million bpd in the second half of the year, according to Reuters calculations, while to meet the IEA's full-year forecast, oil demand growth would need to reach 1.22 million bpd in the second half of the year.

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

Can OPEC+ increase production as planned?

OPEC+ last week confirmed plans to increase production from October and said it could be paused or reversed if necessary.

The increase is based on global oil demand meeting OPEC's forecasts, which will increase demand for oil from OPEC members and their allies. OPEC+ accounts for more than 40% of global crude production.

If OPEC's demand forecasts come true, OPEC+ members' crude oil demand is expected to reach 43.9 million bpd in the fourth quarter, up from 40.8 million bpd in June, theoretically providing room for additional production.

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

Saudi Aramco Chief Executive Amin Nasser said on Tuesday he expected oil production to grow by 1.6 million to 2 million barrels per day in the second half of the year.

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

Uncertain demand outlook

There are clear differences between the IEA and OPEC in their views on the outlook for China's oil demand.

Preliminary data from data intelligence firm Kpler showed that China's crude oil imports rebounded slightly in August from July, while two traders involved in China's purchases of West African crude said demand for crude oil for August loading was weak.

Global demand for jet fuel is expected to exceed 2019 levels this year, according to the International Air Transport Association (IATA).

“Everyone points out that the main levers to drive demand growth are jet fuel demand and China,” said a source at an oil trading firm.

In the United States, the largest oil consumer, gasoline demand has been difficult to measure: A revision to official data last week showed demand in May at its highest level since August 2019. Earlier estimates and independent trackers had pegged demand below last year.

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

Article forwarded from: Jinshi Data